<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 2, 1998
REGISTRATION NO. 333-31111
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
THE SPORTSMAN'S GUIDE, INC.
(Exact name of registrant as specified in its charter)
------------------------------
<TABLE>
<S> <C>
MINNESOTA 41-1293081
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
411 FARWELL AVENUE
SOUTH ST. PAUL, MINNESOTA 55075
(612) 451-3030
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------------
GARY OLEN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
THE SPORTSMAN'S GUIDE, INC.
411 FARWELL AVENUE
SOUTH ST. PAUL, MINNESOTA 55075
(612) 451-3030
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
STEVEN R. WATTS, ESQ. AMY E. AYOTTE, ESQ.
Chernesky, Heyman & Kress P.L.L. Dorsey & Whitney LLP
1100 Courthouse Plaza, S.W. 220 South Sixth Street
Dayton, Ohio 45402 Minneapolis, Minnesota 55402
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same
offering. / / ______________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ______________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY 2, 1998
PROSPECTUS
2,000,000 SHARES
[LOGO]
COMMON STOCK
Of the 2,000,000 shares of Common Stock offered hereby (the "Shares"),
1,600,000 Shares are being sold by The Sportsman's Guide, Inc. (the "Company")
and 400,000 Shares are being sold by certain selling shareholders of the Company
(the "Selling Shareholders"). The Company will not receive any of the proceeds
from the sale of Shares by the Selling Shareholders. See "Principal and Selling
Shareholders."
Although the Common Stock is traded in the local over-the-counter market
under the symbol "SGDE," such trading has been limited and sporadic. On December
29, 1997, the last reported sale price of the Common Stock was $5.25 per share.
See "Price Range of Common Stock." It is currently estimated that the public
offering price will be between $7.00 and $9.00 per Share. See "Underwriting" for
the factors to be considered in determining the public offering price. The
Common Stock has been approved for listing on the Nasdaq National Market under
the symbol "SGDE" upon completion of this offering.
------------------------
THE COMMON STOCK OFFERED BY THIS PROSPECTUS IS SPECULATIVE AND INVOLVES A
HIGH DEGREE OF RISK. SEE "RISK FACTORS" ON PAGE 5.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
DISCOUNTS AND PROCEEDS TO SELLING
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(2)
<S> <C> <C> <C> <C>
Per Share................ $ $ $ $
Total(3)................. $ $ $ $
</TABLE>
(1) Excludes a non-accountable expense allowance equal to 2% of the total Price
to Public payable by the Company to the Representatives of the Underwriters
and issuance by the Company to the Representatives for nominal consideration
of a five-year warrant to purchase up to 100,000 shares of Common Stock
exercisable at 120% of the Price to Public. In addition, the Company and the
Selling Shareholders have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $868,000,
including the Representatives' non-accountable expense allowance, and
expenses payable by the Selling Shareholders estimated at $112,000. See
"Underwriting."
(3) The Selling Shareholders have granted the Underwriters a 30-day option to
purchase up to an additional 300,000 shares of Common Stock solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Selling Shareholders will be $ , $ and $ ,
respectively. See "Underwriting."
The shares of Common Stock are offered severally by the Underwriters named
herein, subject to prior sale, when, as and if delivered to and accepted by the
Underwriters, and subject to the right of the Underwriters to reject any order
in whole or in part and certain other conditions. It is expected that delivery
of the certificates for the Common Stock will be made against payment therefor
at the offices of Cruttenden Roth Incorporated, Irvine, California, on or about
, 1998.
------------------------
<TABLE>
<C> <S>
CRUTTENDEN ROTH JOHN G. KINNARD AND COMPANY,
I N C O R P O R A T E D I N C O R P O R A T E D
</TABLE>
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
[INSIDE FRONT COVER]
[The Sportsman's Guide Logo]
[Photograph of camping scene with tent and man by fire, overlayed on mountain
scene]
The Sportman's Guide...
outfitting the nation's outdoorsmen with gear and clothing at discount prices
1-800-888-.30-06
www.sportsmansguide.com
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING BIDS, THE IMPOSITION OF
PENALTY BIDS, THE PURCHASE OF SECURITIES TO COVER SYNDICATE SHORT POSITIONS AND
OVERALLOTMENTS IN CONNECTION WITH THE OFFERING. FOR A DISCUSSION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
"The Sportsman's Guide" and "The 'Fun-to-Read' Catalog" are registered
trademarks of the Company in the United States. Trade names and trademarks of
other companies appearing in this Prospectus are the property of their
respective holders.
<PAGE>
[INSIDE GATEFOLD]
Quality, Name Brand Products At Discount Prices
Sold To Over 1 Million Customers In The Last Year.
Hunting and Camping Gear. Footwear and Clothing. Military Surplus. Ammunition.
Gifts and More.
[Picture of various Company catalogs surrounded by
pictures of sample products sold by the Company.]
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. UNLESS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS
REFLECTS A 1-FOR-10 REVERSE STOCK SPLIT EFFECTIVE MARCH 5, 1997. REFERENCES TO
FISCAL YEAR REFER TO THE COMPANY'S 52 OR 53 WEEK FISCAL YEAR ENDED THE FRIDAY
NEAREST DECEMBER 31 FOR YEARS PRIOR TO 1997 AND THE SUNDAY NEAREST DECEMBER 31
FOR 1997.
THE COMPANY
The Sportsman's Guide, Inc. (the "Company") is a leading mail order catalog
retailer of value priced outdoor, hunting and general merchandise. The Company
primarily targets men who are hunters, outdoorsmen and collectors, offering a
wide selection of high value products at low prices as well as unique products.
The Company sells its products through distinctive catalogs that are marketed as
The "Fun-to-Read" Catalog-Registered Trademark- featuring creative and expansive
use of art and copy to describe products in a humorous and entertaining fashion.
Products are offered for sale at what the Company advertises as "ridiculously
low prices," made possible by the Company's purchasing strategy, which is
increasingly focused on manufacturers' close-outs and military surplus items.
Products are routinely offered at savings of 25% to 60% from original retail
prices. The Company employs an information intensive management approach to
merchandising, marketing and customer list management, continually testing,
assessing and adjusting day-to-day activities as well as long-term strategies.
The Company's short catalog lead time (approximately 60 days) gives it a high
degree of flexibility to make changes in upcoming catalogs based on up-to-date
information. The Company believes that its niche marketing focus on the
value-oriented outdoorsman, together with its product offerings, catalog formats
and management strategy, position it uniquely within the direct marketing
industry.
According to industry reports, from 1992 to 1996 U.S. consumer catalog sales
volume grew at a rate of approximately 8% annually to an estimated $46 billion
in 1996. Between 1992 and 1996, U.S. catalog sales growth outpaced that of the
retail industry. The Company believes that its target market of value-oriented
men is a growing niche that is currently underserved, since most catalogs are
targeted to women. Industry data show that in 1996, 52% of American men bought
from catalogs, up from 38% in 1994.
The Company sells its products through monthly main catalogs and specialty
catalogs. Products offered include footwear, clothing and accessories, hunting
and shooting accessories, camping and outdoor recreation equipment, optics,
collectibles, gift items and a diverse range of additional offerings in other
product categories. The Company's catalogs consist of a changing mix of products
from catalog to catalog. The Company believes this dynamic product mix and the
humorous, entertaining format are key competitive advantages that keep customers
reading each catalog. In addition, the Company offers a high level of customer
service including a buyer's club, an interest free payment plan and an
unconditional return policy in an attempt to foster increased customer loyalty.
The monthly general catalog contains a wide variety of product offerings and is
sent to a relatively broad range of customers in the Company's targeted market.
The specialty catalogs offer a more narrow selection of product categories, but
a deep and broad selection of products in each featured category. Specialty
catalogs are sent to core groups of the Company's mailing list that have
demonstrated a propensity to buy products from the featured product category.
Product categories featured in specialty catalogs include footwear and apparel,
deer hunting equipment, camping equipment, military surplus and ammunition and
shooting supplies. The Company circulated 11 monthly and 18 specialty catalogs
which made up a total circulation of approximately 61 million catalogs in 1997.
Catalogs are mailed to persons selected from the Company's 3.6 million name
database and rented or exchanged mailing lists. Over one million customers have
purchased from the Company in the last 12 months.
The Company's predecessor was founded by Gary Olen in 1970 as a direct
marketer focused on the deer hunter. The Company's product offerings and
marketing efforts have evolved to broaden the Company's focus to include the
value-oriented male in general, and the outdoorsman in particular. In 1992, the
Company instituted a value pricing approach by which high quality products are
sold at below
2
<PAGE>
normal retail prices. The Company believes this value pricing approach has been
the key factor in its significant sales growth since that time, driving sales
from $38 million in 1992 to $112 million in 1996. In 1994, the Company began to
strengthen its management team in an effort to capitalize on the opportunity
represented by the recent sales growth. The Company has added experienced direct
marketing professionals in each of its key functional areas over the past few
years. The new management team has focused on improving profitability by
investing in advanced information systems to allow better and more timely
decision making, increasing the emphasis on higher margin manufacturers'
close-outs and military surplus items and implementing extensive cost control
programs.
The Company's strategy is based on five key elements: (i) expand and
capitalize on the value-oriented male niche; (ii) offer quality, name brand and
unique products at value pricing; (iii) provide a fun and convenient shopping
experience; (iv) manage by proactively using information systems; and (v)
capitalize on the Company's flexible structure and short catalog lead time.
The Company was incorporated under the laws of the State of Minnesota on
March 23, 1977 as The Olen Company, Inc. At that time the Company acquired the
business and assets of The Olen Company, a sole proprietorship owned by Gary
Olen, the President and Chief Executive Officer of the Company. In March 1986,
the Company changed its name to The Sportsman's Guide, Inc. The Company's
principal executive offices are located at 411 Farwell Avenue, South St. Paul,
Minnesota 55075, and its telephone number is (612) 451-3030. The Company's web
site address is www.sportsmansguide.com.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the
Company..................... 1,600,000 shares
Common Stock offered by the
Selling Shareholders........ 400,000 shares
Common Stock to be outstanding
after the offering.......... 3,959,649 shares(1)
Use of proceeds by the
Company..................... To repay subordinated notes payable, to repurchase Series A Preferred Stock and for working capital
and general corporate purposes. See "Use of Proceeds."
Proposed Nasdaq National
Market Symbol............... SGDE
</TABLE>
- ------------------------
(1) Excludes 348,439 shares issuable upon the exercise of options and 695,603
shares issuable upon the exercise of warrants as of December 29, 1997 (after
deducting 20,424 shares for sale in this offering which will be issued
pursuant to the exercise of warrants by a Selling Shareholder). Warrants
covering 695,603 shares will expire 30 days following completion of this
offering if not exercised prior to such time. See "Shares Eligible for
Future Sale."
1989 BANKRUPTCY PROCEEDING
The Company operated as a debtor in possession under Chapter 11 of the
United States Bankruptcy Code from April to November 1989. Under the Company's
plan of reorganization, Vincent W. Shiel, the current Chairman of the Board of
the Company, and certain other investors purchased a controlling interest in the
Company equal to 70% of the Common Stock, purchased 20,000 shares of Series A
Preferred Stock and provided the Company with an operating loan. See "Certain
Transactions" and "Principal and Selling Shareholders." The reorganization plan
was consummated in January 1990.
3
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND SELECTED OPERATING DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THIRTY-NINE WEEKS ENDED
------------------------------------------------------- ----------------------------
JAN. 1, DEC. 31, DEC. 30, DEC. 29, DEC. 27, SEPTEMBER 27, SEPTEMBER 26,
1993 1993 1994 1995 1996 1996 1997
--------- --------- --------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales................................. $ 38,162 $ 60,191 $ 96,398 $ 101,832 $ 112,270 $ 69,273 $ 77,611
Earnings (loss) from operations....... 592 (26) 3,732 (1,229) 4,056 632 1,485
Net earnings (loss)................... 511 (478) 2,722 (1,744) 2,327 (72) 339
Net earnings (loss) per common and
common equivalent share:
Primary........................... $ .22 $ (.20) $ 1.05 $ (.75) $ .92 $ (.03) $ .12
Fully diluted(1).................. .22 (.20) 1.01 (.75) .91 (.03) .11
Weighted average common and common
equivalent shares outstanding:
Primary........................... 2,333 2,333 2,588 2,334 2,589 2,334 2,888
Fully diluted(1).................. 2,333 2,333 2,700 2,334 2,589 2,334 3,006
SELECTED OPERATING DATA:
Gross profit as a percentage of
sales............................... 30.7% 29.5% 33.2% 34.1% 35.7% 34.1% 39.1%
Total catalogs mailed (000s).......... 12,698 21,886 39,312 54,436 42,908 28,344 39,557
Total active customers (000s)(2)...... 561 773 1,021 1,034 1,017 969 1,051
Income (loss) per advertising
dollar(3)........................... $ .09 $ .00 $ .24 $ (.06) $ .21 $ .05 $ .09
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 26, 1997
-------------------------
ACTUAL AS ADJUSTED(4)
--------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................................................ $ 391 $ 10,337
Total assets........................................................................... 40,665 47,197
Long-term debt (less current maturities)............................................... 118 118
Shareholders' equity................................................................... 4,229 14,175
</TABLE>
- ------------------------
(1) See Note A-12 in the Notes to Financial Statements.
(2) An "active customer" is defined as a customer who has purchased merchandise
from the Company within 12 months preceding the end of the period indicated.
(3) "Income (loss) per advertising dollar" is defined as earnings (loss) from
operations divided by advertising expense.
(4) Adjusted to give effect to (i) the sale of 1,600,000 shares of Common Stock
by the Company at an assumed Price to Public of $8.00 per share and the
application of the estimated net proceeds therefrom, including the repayment
of $3,414,000 of subordinated notes payable and the repurchase of 20,000
shares of the Company's Series A Preferred Stock for $1,000,000 and (ii) the
issuance of 20,424 shares of Common Stock pursuant to the exercise of
warrants by a Selling Shareholder at an exercise price of $1.88 per share.
4
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE PURCHASING SHARES
OF COMMON STOCK OFFERED HEREBY.
RISKS ASSOCIATED WITH CATALOG RETAILING
The Company's success depends on the success of its catalog business, which
the Company believes is achieved through the efficient targeting of its
mailings, appropriate shifts in the Company's merchandising mix, the Company's
ability to achieve adequate response rates to its mailings and the Company's
ability to accurately forecast economic conditions and consumer demand. Catalog
mailings involve substantial postage, paper, printing and merchandise
acquisition costs which are incurred prior to the mailing of each catalog. If
for any reason the Company were to experience a significant shortfall in
anticipated sales from a particular catalog mailing and thereby not recover
costs associated with that catalog edition, the Company's business, financial
condition and results of operations could be adversely affected. In addition,
response rates and sales generated by each catalog mailing can be affected by
factors such as consumer preferences, economic conditions, timing of the
Company's and competitors' catalog mailings and merchandise mix. Any inability
of the Company to accurately target the appropriate customers or to achieve
adequate response rates could result in lower sales and lower margins which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE ON SERVICE PROVIDERS
The Company's ability to distribute its catalogs and to fill customer orders
depends on services provided by third parties. The Company is dependent on (i)
outside printers to print and mail its catalogs, (ii) shipping companies and the
U.S. Postal Service for timely delivery of its catalogs and shipment of its
merchandise to customers and (iii) an outside call center to handle inbound
customer telephone orders when calls become backlogged or in the event of
telephone system failure. Any disruption in these services could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Operations and Fulfillment."
The United Parcel Service ("UPS") strike in August 1997 and related events
negatively impacted the Company's sales in the third quarter of 1997. Although
the Company is not dependent upon UPS to ship most of its products (other than
ammunition, which is shipped solely through UPS and accounted for approximately
5.7% of the Company's sales in 1997), management believes the UPS strike and
resulting publicity created a perception among buyers that orders could not be
delivered or that delivery would be significantly delayed. This perception
resulted in a decrease in orders for the Company's product offerings and
therefore suppressed sales. The Company was further impacted when the overloaded
U.S. Postal Service failed to deliver the Company's catalogs on a timely basis,
or at all, during and after the UPS strike. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations."
There is currently uncertainty regarding UPS's labor relations with its
in-house pilots union. The pilots have operated without a contract since 1995.
Formal negotiations on a new contract are expected to begin in January 1998.
There can be no assurance that strikes, delays or disruptions in service will
not occur in the future. Such occurrences could have a material adverse effect
on the Company's business, financial condition and results of operations.
INCREASES IN POSTAGE AND PAPER COSTS; PAPER AVAILABILITY
Increases in postal rates and paper costs have a significant impact on the
cost of production and mailing of the Company's catalogs and the shipment of
customer orders. Postage prices increase periodically, and the Company has no
control over increases that may occur in the future. The U.S. Postal Service has
recently proposed an increase in postal rates which, if approved, could go into
effect in 1998. Paper
5
<PAGE>
prices historically have been cyclical and significant increases have been
experienced by the Company in the past. Significant increases in postal rates or
paper costs could have a material adverse effect on the Company's business,
financial condition and results of operations, particularly to the extent the
Company is unable to pass on such increases directly to its customers or offset
such increases by reducing other costs.
In addition, the Company is dependent upon the availability of paper to
print its catalogs. Paper shortages have occurred in the past and may occur in
the future. Any such paper shortage may increase the Company's paper costs and
cause the Company to reduce its catalog circulation, change to a different
weight or grade of paper or reduce the number of pages per catalog. Such
increased costs or responsive actions could have a material adverse effect on
the Company's business, financial condition and results of operations.
LIST DEVELOPMENT AND MAINTENANCE
The Company mails catalogs to names in its proprietary customer database and
to potential customers whose names are obtained from rented or exchanged mailing
lists. Names derived from rented or exchanged lists generate lower response
rates while requiring the same or greater advertising expenses than names in the
Company's database. Consequently, overall response rates could decline while
expenses increase if the Company were to increase its use of rented or exchanged
lists relative to the use of names in its customer database. In addition, the
Company must constantly update its mailing list by identifying new prospective
customers and tracking purchases by existing customers. The Company uses
internally developed customer segmentation models to identify prospective and
existing customers to whom a catalog will be mailed. Inaccurate models or the
Company's failure to update its mailing list could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business-- Marketing."
There has been increasing public concern regarding right to privacy issues
involved with the rental and use of customer mailing lists among direct
marketing retailers. Any legislation enacted at the federal or state level
limiting or prohibiting this practice could have a material adverse effect on
the Company's new customer acquisition strategies.
DEPENDENCE ON SENIOR MANAGEMENT
The Company's success is dependent to a significant extent on the efforts of
members of senior management, including Gary Olen, the Company's President,
Chief Executive Officer and co-founder. The Company's ability to attract and
retain well-qualified senior management and other key personnel is crucial to
the Company's successful continued operations. The loss of any member of senior
management could have a material adverse effect upon the Company. The Company
maintains key-man life insurance on Mr. Olen and has entered into employment
agreements with certain of its senior managers. See "Management."
QUARTERLY FLUCTUATIONS AND SEASONALITY
The Company's sales and results of operations have fluctuated and can be
expected to continue to fluctuate on a quarterly basis as a result of a number
of factors, including: the timing of new merchandise and catalog offerings;
recognition of costs or sales contributed by new merchandise and catalog
offerings; fluctuations in response rates; fluctuations in postage, paper and
printing costs and in merchandise returns; adverse weather conditions that
affect response, distribution or shipping; shifts in the timing of holidays; and
changes in the Company's product mix. The Company recognizes the cost of catalog
production and mailing over the estimated useful lives of the catalogs, ranging
from four to six months from the catalog's in-home date. Consequently,
quarter-to-quarter sales and expense comparisons will be impacted by the timing
of the mailing of the Company's catalog editions.
6
<PAGE>
The majority of the Company's sales historically occur during the third and
fourth fiscal quarters. The seasonal nature of the Company's business is due to
the catalog's focus on hunting merchandise and related accessories for the fall,
as well as winter apparel and gifts for the holiday season. The Company expects
this seasonality will continue in the future. In anticipation of increased sales
activity during the third and fourth fiscal quarters, the Company incurs
significant additional expenses for hiring additional employees and building
inventory levels. If for any reason the Company's sales were to fall below its
expectations during the third and fourth fiscal quarters, the Company's
business, financial condition and results of operations could be adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Quarterly Fluctuations and Seasonality."
RISK OF CHANGING ECONOMIC CONDITIONS AND CONSUMER PREFERENCES
The Company's business is sensitive to changes in discretionary consumer
spending, which is controlled to a large extent by prevailing economic
conditions. A recession in the national or regional economies or uncertainties
regarding future economic prospects could affect consumer spending habits and
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company is also subject to risks associated with changing consumer
preferences. Failure to anticipate and respond to changes in consumer
preferences in a timely or commercially appropriate manner could lead to lower
sales or margins which could have a material adverse effect on the Company's
business, financial condition and results of operations.
RISKS OF BUSINESS INTERRUPTION OR DISASTER; DEPENDENCE ON SINGLE FACILITY
The Company's ability to receive, process and fulfill customer orders
depends on the effective operation of its telephone lines, operational and
management information systems, and warehouse and distribution facility. Any
material disruption in the Company's order receipt, processing or fulfillment
systems resulting from internal or external telephone system failure, electrical
problems, failure of the Company's information systems or other technical
problems could cause significant delays in the Company's ability to receive and
fill orders and may cause orders to be lost, shipped or delivered late or
cancelled by the customer. The Company maintains a single warehouse and
distribution facility at its headquarters in South St. Paul, Minnesota. If this
facility were to be destroyed or significantly damaged by fire or other
disaster, the Company would need to obtain alternative facilities and replenish
its inventory, either of which would result in significantly increased operating
costs and delays in fulfilling customer orders. The increased costs and delays
associated with such disruptions could have a material adverse effect on the
Company's business, financial condition and results of operations. While the
Company maintains business interruption insurance, there can be no assurance
that such levels of insurance will be adequate. Additionally, the Company's
lease on its warehouse and distribution facility expires in March 1999. If the
Company does not renew the lease, the Company would be required to move its
operations to another location and as a result could incur additional costs and
operating expenses. See "Business--Properties."
DEPENDENCE ON SOURCING MERCHANDISE
The Company offers a changing mix of products. This changing mix of products
presents certain unique challenges in finding merchandise for the Company's
catalogs. The Company's buyers must develop and maintain relationships with
vendors to locate sources for high quality, low price, name brand merchandise
they believe will interest the Company's customers. The Company competes with
non-catalog retailers for much of the merchandise offered in its catalogs. There
can be no assurance that the Company will be able to locate sources for or
maintain ongoing access to manufacturers' close-outs, military surplus and other
items featured by the Company or that such merchandise will be available to the
Company at the times or prices or in the quantities desired. See
"Business--Merchandising."
7
<PAGE>
COMPETITION
The direct marketing industry is highly competitive and fragmented. Although
the Company believes that no competitor offers as comprehensive a selection of
products at discount prices, the Company has significant competitors within each
merchandise category and may face competition from new entrants or existing
competitors who shift focus to markets currently served by the Company. These
competitors include other outdoor/hunting or discount mail order catalogs or
retailers. Some of these competitors are larger and have substantially greater
financial, marketing and other resources than the Company. An increase in the
amount of competition faced by the Company or its failure to compete effectively
against its competitors could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business--Competition."
INVENTORY COST AND MARK-DOWNS
The Company frequently purchases large quantities of manufacturers'
close-outs and other individual product items on an opportunistic or
when-available basis. The seasonal nature of the merchandise or the timing of
its acquisition may require that it be held for several months before being
offered in a catalog. This can result in increased inventory levels and lower
inventory turnover, thereby increasing the Company's working capital
requirements and related carrying costs. Increased inventory levels, lower
turnover rates and the inability to return manufacturers' close-outs, military
surplus and direct imported merchandise to vendors increase the risk of future
inventory mark-downs.
AVAILABILITY OF LABOR
The Company's executive offices, warehouse and distribution facilities are
located in South St. Paul, Minnesota. Due to the current low unemployment rate
in the Minneapolis/St. Paul metropolitan area, the Company faces a shrinking
pool of available labor and could experience labor shortages and higher labor
costs in the future, particularly when numerous additional employees are needed
for the Company's peak selling season. The Company uses dedicated agents at an
outside call center to meet its needs for additional qualified telemarketing
agents when the Company is unable to hire locally, which results in an increase
in the Company's operating costs. Such labor shortages and higher costs could
have a material adverse effect on the Company's business, financial condition
and results of operations.
MERCHANDISE RETURNS
The Company maintains a policy of making refunds or exchanges for all
merchandise returned by customers for any reason, and places no time limit on
this return policy. As the Company's merchandise mix of footwear and apparel has
increased so have merchandise returns. While the Company makes allowances in its
financial statements for anticipated merchandise returns based on historical
return rates, its history of forecasting footwear and apparel returns is
limited. Consequently, there can be no assurance that actual merchandise returns
will not exceed the Company's allowances. Any significant increase in
merchandise returns or merchandise returns that exceed the Company's reserves
could have a material adverse effect on the Company's business, financial
condition and results of operations.
CONTROL BY PRINCIPAL SHAREHOLDERS AND MANAGEMENT
Upon completion of this offering, the current executive officers and
directors of the Company (including Vincent W. Shiel, the Chairman of the Board
of the Company, and members of his family as well as trusts for the benefit of
children and grandchildren) will beneficially own approximately 31.5% (25.3% if
the Underwriters' over-allotment option is exercised in full) of the outstanding
shares of Common Stock. Such persons will also beneficially own exercisable
warrants and options to purchase 658,386 shares of Common Stock, which if fully
exercised would result in such persons beneficially owning 41.2% (35.9% if the
Underwriters' over-allotment option is exercised in full) of the outstanding
shares of Common Stock.
8
<PAGE>
Of the warrants and options to purchase 658,386 shares, warrants for 410,522
shares are expected to be exercised within 30 days following completion of this
offering.
As a result of such ownership, such persons will be able to greatly
influence the outcome of shareholder votes including votes concerning the
election of directors and changes in control. Such a level of ownership can have
the effect of delaying or preventing a change in control of the Company and can
adversely affect the voting and other rights of the other holders of Common
Stock. In addition, the Company's Restated Articles of Incorporation provide
that shareholders may cumulate their votes for the election of directors, which
may allow shareholders owning less than a majority of the outstanding shares of
Common Stock to elect one or more directors. See "Principal and Selling
Shareholders" and "Description of Capital Stock."
GOVERNMENT REGULATION
The Company is subject to federal, state and local laws and regulations
which affect its business. Federal Trade Commission regulations govern the
manner in which orders may be solicited and prescribe other obligations in
fulfilling orders and consummating sales. Other laws and regulations prohibit or
limit the sale, in certain states and localities, of certain items offered in
the Company's catalogs such as black powder firearms, ammunition, bows, knives
and similar products. The failure to comply with such laws and regulations could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company sells black powder firearms, air guns, ammunition and shooting
accessories. Sales of these products accounted for approximately 15.6% of the
Company's sales in 1997. Government regulation of firearms can affect sales of
these ancillary firearm products, and any increase in such regulation could have
a material adverse effect on the Company's business, financial condition and
results of operations.
State and local government regulation of hunting can result in changes to
hunting seasons, bans or limitations on hunting or other similar restrictions.
Because a significant amount of the Company's sales are attributable to hunting,
such changes or restrictions could decrease the demand for certain of the
Company's products, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company presently does not collect sales or similar taxes on sales of
merchandise shipped to residents of states other than Minnesota. Various states
have sought to impose on direct marketers the burden of collecting state sales
and use taxes on the sale of merchandise shipped to residents of that state. The
U.S. Supreme Court has held that the various states, absent Congressional
legislation, may not impose tax collection obligations on an out-of-state mail
order company whose only contacts with the taxing state are the distribution of
catalogs and other advertisement materials through the mail, and whose
subsequent delivery of purchased goods is by mail or interstate common carriers.
If such legislation is ultimately enacted by Congress or if the Company
otherwise becomes subject to collection of additional sales or use tax, the
imposition of additional tax collection obligations could adversely affect
customer response rates and have a material adverse effect on the Company's
business, financial condition and results of operations.
SHARES ELIGIBLE FOR FUTURE SALE
As of December 29, 1997, the Company had outstanding 2,339,225 shares of
Common Stock, which does not include: (i) the 1,600,000 Shares offered by the
Company hereby, (ii) 348,439 shares of Common Stock issuable upon the exercise
of outstanding options, (iii) 220,000 shares of Common Stock issuable upon the
exercise of options granted contingent upon the completion of this offering or
(iv) 716,027 shares of Common Stock issuable upon the exercise of warrants (of
which 20,424 shares for sale in this offering will be issued pursuant to the
exercise of warrants by a Selling Shareholder) which must be exercised or will
expire 30 days after this offering.
9
<PAGE>
Sales of substantial amounts of the Company's Common Stock could adversely
affect prevailing market prices of the Company's Common Stock and could impair
the Company's ability to raise additional capital. Of the shares of Common Stock
outstanding as of December 29, 1997 (other than the 400,000 Shares offered by
the Selling Shareholders hereby), approximately 411,086 shares are not subject
to the lock-up agreements described below and are freely tradeable pursuant to
Rule 144(k) or other exemptions from registration under the Securities Act of
1933. Approximately 1,548,563 shares of Common Stock outstanding as of December
29, 1997 are subject to lock-up agreements and will be eligible for sale 180
days after the completion of this offering (approximately 794,005 of which will
be subject to the requirements of Rule 144). Additionally, holders of 264,364
options exercisable upon the completion of this offering and holders of 695,603
warrants (after deducting 20,424 shares for sale in this offering which will be
issued pursuant to the exercise of warrants by a Selling Shareholder) have
agreed not to offer, sell or otherwise dispose of the shares issuable upon the
exercise of such options and warrants for a period of 180 days from the
effective date of this offering without the prior written consent of Cruttenden
Roth Incorporated. Also, upon execution of the Underwriting Agreement, the
Company will sell the Representatives of the Underwriters a five-year warrant to
purchase up to 100,000 shares of Common Stock which includes customary demand
and participatory registration rights.
The warrants covering 695,603 shares will expire 30 days following
completion of this offering unless exercised prior to such time. The Company
expects that all or substantially all of the warrants will be exercised and
intends to register the resale of the 695,603 shares issuable thereunder
following the completion of this offering for the benefit of the warrant
holders. If so registered, such shares will be saleable by the holders thereof
in the public market subject to the restrictions of the lock-up agreements
described above. See "Shares Eligible for Future Sale" and "Underwriting."
PRODUCT LIABILITY EXPOSURE
The Company's products include black powder firearms, ammunition, machetes,
air guns, paintball guns, blank firing firearms, bows, slingshots, knives, stun
guns, blowguns, crossbows, certain non-lethal and chemical spray devices and
other potentially dangerous products. Although the Company is not a manufacturer
of any of these products, the sale of these products involves a risk of being
named as a party defendant in product liability litigation. No assurance can be
given that the Company's insurance will cover all potential claims arising from
the sale of such products or that the amount of the coverage will be adequate,
nor can assurance be given that adequate insurance coverage can be obtained in
the future at an acceptable cost or at all. Any uninsured or inadequately
insured claim or liability could have a material adverse effect on the Company's
business, financial condition and results of operations.
POSSIBLE VOLATILITY OF STOCK PRICE
Although the Company's Common Stock is traded in the local over-the-counter
market, such trading has been limited and sporadic. The public offering price
will be determined by negotiation between the Company, the Selling Shareholders
and the Representatives of the Underwriters based on several factors and may not
necessarily reflect the market price of the Common Stock after this offering or
the price at which the Common Stock may be sold in the public market after the
offering. See "Underwriting."
The market price for the Common Stock may be significantly affected by such
factors as the Company's operating results, the actions of competitors, news
announcements or changes in general economic and market conditions. The Common
Stock has been approved for listing on the Nasdaq National Market upon
completion of this offering. The Nasdaq National Market has experienced a high
level of price and volume volatility and market prices for the stock of many
companies have experienced wide price fluctuations not necessarily related to
the operating performance of the companies.
10
<PAGE>
DILUTION
The following gives effect to the issuance of the Shares offered hereby at
an assumed Price to Public of $8.00, but does not give effect to any exercise of
outstanding options or warrants to purchase an aggregate of 1,065,904 shares of
Common Stock at an average exercise price of $2.43 per share as of September 26,
1997. The book value of the Company's Common Stock at September 26, 1997 was
$4,229,000 or $1.81 per share. "Book value" represents assets less liabilities
of the Company, and "book value per share" was determined by dividing the book
value of the Company by the number of shares of Common Stock outstanding on
September 26, 1997. See "Capitalization." "Dilution in book value per Share to
new investors" represents the difference between the Price to Public per Share
and the pro forma book value per share after this offering. Without taking into
account any changes in the Company's book value per share after September 26,
1997, other than to give effect to (i) the sale of the Shares offered hereby
(net of underwriting discount and estimated offering expenses payable by the
Company and prior to the application of the estimated net proceeds) and (ii) the
issuance of 20,424 shares pursuant to the exercise of warrants by a Selling
Shareholder at an exercise price of $1.88 per share, the pro forma book value of
the Company at September 26, 1997 would have been $15,175,000 or $3.83 per
share. This represents an immediate increase in book value to the existing
shareholders of $2.02 per share and an immediate book value dilution to
purchasers of the Shares of $4.17 per share, as illustrated by the following
table:
<TABLE>
<S> <C> <C>
Assumed Price to Public per Share............................. $ 8.00
Book value per share at September 26, 1997.................. $ 1.81
Increase per share attributable to new investors............ 2.02
---------
Pro forma book value per share after the offering............. 3.83
---------
Dilution in book value per share to new investors............. $ 4.17
---------
---------
</TABLE>
After the effect of applying $1,000,000 of the net proceeds to repurchase
the Company's Series A Preferred Stock, the pro forma book value of the Company
at September 26, 1997 would have been $14,175,000 or $3.58 per share. This
represents an immediate increase in book value to the existing shareholders of
$1.77 per share and an immediate book value dilution to purchasers of the Shares
of $4.42 per share.
The following table summarizes, on a pro forma basis, the difference between
the number of shares of Common Stock purchased from the Company by existing
shareholders (as of September 26, 1997, which does not include the issuance of
20,424 shares pursuant to the exercise of warrants by a Selling Shareholder at
an exercise price of $1.88 per share) and by new investors in this offering, the
total consideration paid to the Company and the average price paid per share.
The table assumes that no Shares are purchased in this offering by existing
shareholders. To the extent existing shareholders purchase Shares in this
offering, their percentage ownership, total consideration and average
consideration per Share will be greater than as shown.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- -------------------------- CONSIDERATION
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing Shareholders............................... 2,339,225 59.4% $ 2,388,000 15.7% $ 1.02
New investors....................................... 1,600,000 40.6 12,800,000 84.3 8.00
---------- ----- ------------- -----
Total............................................... 3,939,225 100.0% $ 15,188,000 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,600,000 shares of
Common Stock offered by the Company are estimated to be approximately
$10,908,000, after deducting the underwriting discount and estimated offering
expenses payable by the Company, based on an assumed Price to Public of $8.00
per share. The Company intends to apply these proceeds approximately as follows:
<TABLE>
<S> <C>
Repayment of subordinated notes
payable............................... $ 3,414,000
Repurchase of Series A Preferred
Stock................................. 1,000,000
Working capital and general corporate
purposes.............................. 6,494,000
-----------
Total................................. $10,908,000
-----------
-----------
</TABLE>
REPAYMENT OF SUBORDINATED NOTES PAYABLE. The Company plans to use
approximately $3,414,000 of the net proceeds to repay subordinated notes payable
due June 15, 1998. These notes are payable to certain of the Selling
Shareholders and others and bear interest at 1.75% over prime but not less than
9% per annum (10.25% at December 29, 1997). The subordinated notes payable were
issued in May 1996 to replace and renew subordinated notes issued in February
1994. See "Certain Transactions."
REPURCHASE OF SERIES A PREFERRED STOCK. The Company plans to use $1,000,000
of the net proceeds to repurchase 20,000 shares of the Company's Series A
Preferred Stock, representing all of the issued and outstanding Series A
Preferred Stock. The holders of the Series A Preferred Stock include certain
Selling Shareholders. See "Principal and Selling Shareholders." See also
"Certain Transactions" for a description of how the purchase price for the
Series A Preferred Stock was determined.
WORKING CAPITAL AND GENERAL CORPORATE PURPOSES. The Company plans to use
the balance of the net proceeds for working capital and general corporate
purposes. The Company may use a portion of the proceeds to increase purchases of
manufacturers' close-outs, military surplus and direct imported merchandise, and
to accommodate vendor payment terms required for cash discounts.
Pending such uses, the net proceeds may be invested in short-term,
investment-grade, interest-bearing securities or may be used to pay down
outstanding borrowings under the Company's revolving credit facility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Liquidity and Capital Resources."
The Company will not receive any of the proceeds from the sale of Shares by
the Selling Shareholders in this offering or upon the exercise of the
Underwriters' over-allotment option granted by the Selling Shareholders. See
"Principal and Selling Shareholders."
12
<PAGE>
PRICE RANGE OF COMMON STOCK
Although the Company's Common Stock is traded in the local over-the-counter
market, such trading has been limited and sporadic. The following table sets
forth, for the periods indicated, the high and low closing bid quotations for
the Common Stock in the local over-the-counter market as reported by Metro Data
Company, a Minneapolis computer service bureau that collects quotations for
local market makers. Such quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and do not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1995
First Quarter........................................... $10 $ 5 5/8
Second Quarter.......................................... 6 7/8 2 1/2
Third Quarter........................................... 5 2 1/2
Fourth Quarter.......................................... 3 1/8 15/16
1996
First Quarter........................................... 15/16 5/16
Second Quarter.......................................... 1 7/8 5/16
Third Quarter........................................... 1 7/8 1 7/8
Fourth Quarter.......................................... 2 1/2 1 1/2
1997
First Quarter........................................... 5 2 3/16
Second Quarter.......................................... 6 3 1/2
Third Quarter........................................... 6 7/8 5 1/2
Fourth Quarter.......................................... 7 3/8 5 1/4
</TABLE>
On December 29, 1997, the last reported sale price of the Common Stock was
$5.25 per share. As of December 29, 1997, there were approximately 303 holders
of record of the Company's Common Stock.
The Common Stock has been approved for listing on the Nasdaq National Market
under the symbol "SGDE" upon completion of this offering.
DIVIDEND POLICY
The Company has not previously declared or paid any cash dividends on its
Common Stock. The Company currently intends to retain all earnings for use in
its business in the foreseeable future. The Company is prohibited from paying
and declaring cash dividends under the terms of its revolving credit agreement.
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 26, 1997, and as adjusted to give effect to (i) the sale of 1,600,000
shares of Common Stock by the Company at an assumed Price to Public of $8.00 per
share and the application of the estimated net proceeds therefrom, including
repayment of the subordinated notes payable and repurchase of the Series A
Preferred Stock and (ii) the issuance of 20,424 shares pursuant to the exercise
of warrants by a Selling Shareholder at an exercise price of $1.88 per share.
<TABLE>
<CAPTION>
SEPTEMBER 26, 1997
----------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
------------- -------------
SHORT-TERM DEBT:
Note payable--bank............................................................... $ 13,256,157 $ 13,256,157
Current maturities of long-term debt............................................. 44,023 44,023
Subordinated notes payable....................................................... 3,413,429 --
------------- -------------
$ 16,713,609 $ 13,300,180
------------- -------------
------------- -------------
LONG-TERM DEBT:
Note payable to a government agency.............................................. $ 115,000 $ 115,000
Other............................................................................ 3,184 3,184
SHAREHOLDERS' EQUITY:
Series A Preferred Stock--$.01 par value; 200,000 shares authorized; 20,000
shares issued and outstanding; no shares outstanding as adjusted............... 200 --
Common Stock--$.01 par value; 36,800,000 shares authorized; 2,339,225 shares
issued and outstanding; 3,959,649 shares as adjusted(1)........................ 23,392 39,596
Additional paid-in capital....................................................... 2,364,318 12,294,314
Accumulated earnings............................................................. 1,841,154 1,841,154
------------- -------------
Total shareholders' equity..................................................... 4,229,064 14,175,064
------------- -------------
Total capitalization......................................................... $ 4,347,248 $ 14,293,248
------------- -------------
------------- -------------
</TABLE>
- ------------------------
(1) Excludes 348,439 shares issuable upon the exercise of options and 695,603
shares issuable upon the exercise of warrants as of December 29, 1997 (after
deducting 20,424 shares for sale in this offering which will be issued
pursuant to the exercise of warrants by a Selling Shareholder). Warrants
covering 695,603 shares will expire 30 days following completion of this
offering if not exercised prior to such time. See "Shares Eligible for
Future Sale."
14
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND SELECTED OPERATING DATA)
The following table sets forth certain historical financial and operating
data for the Company for the periods indicated. The Statement of Operations Data
and Balance Sheet Data as of and for each of the fiscal years ended January 1,
1993, December 31, 1993, December 30, 1994, December 29, 1995 and December 27,
1996 have been derived from the Company's Financial Statements audited by Grant
Thornton LLP, independent certified public accountants. The Selected Operating
Data as of and for the periods indicated were derived or computed from the
Company's circulation or accounting records or the Statement of Operations Data
identified above. The Statement of Operations Data and the Balance Sheet Data as
of and for the thirty-nine weeks ended September 27, 1996 and September 26, 1997
have been derived from the Company's unaudited financial statements. The
unaudited financial statements were prepared on the same basis as the audited
financial statements and, in the opinion of management, contain all normal
recurring adjustments necessary for a fair presentation of the information
presented. The Company's business is impacted by seasonal fluctuations and,
therefore, interim results are not necessarily indicative of results to be
expected for the full year. The information below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
THIRTY-NINE
FISCAL YEAR ENDED WEEKS ENDED
--------------------------------------------------------- -------------
JAN. 1, DEC. 31, DEC. 30, DEC. 29, DEC. 27, SEPTEMBER 27,
1993 1993 1994 1995 1996 1996
--------- ----------- ----------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales.......................................... $ 38,162 $ 60,191 $ 96,398 $ 101,832 $ 112,270 $ 69,273
Cost of sales.................................. 26,460 42,417 64,367 67,137 72,200 45,624
--------- ----------- ----------- --------- --------- -------------
Gross profit................................. 11,702 17,774 32,031 34,695 40,070 23,649
Selling, general and administrative expenses... 11,110 17,800 28,299 35,924 36,014 23,017
--------- ----------- ----------- --------- --------- -------------
Earnings (loss) from operations.............. 592 (26) 3,732 (1,229) 4,056 632
Interest expense............................... (111) (437) (582) (943) (981) (714)
Miscellaneous income (expense), net............ 30 (15) (43) 73 11 10
--------- ----------- ----------- --------- --------- -------------
Earnings (loss) before income taxes.......... 511 (478) 3,107 (2,099) 3,086 (72)
Income taxes................................... -- -- (385) 355 (759) --
--------- ----------- ----------- --------- --------- -------------
Net earnings (loss).......................... $ 511 $ (478) $ 2,722 $ (1,744) $ 2,327 $ (72)
--------- ----------- ----------- --------- --------- -------------
--------- ----------- ----------- --------- --------- -------------
Net earnings (loss) per common and common
equivalent share:
Primary.................................... $ .22 $ (.20) $ 1.05 $ (.75) $ .92 $ (.03)
--------- ----------- ----------- --------- --------- -------------
--------- ----------- ----------- --------- --------- -------------
Fully diluted(1)........................... $ .22 $ (.20) $ 1.01 $ (.75) $ .91 $ (.03)
--------- ----------- ----------- --------- --------- -------------
--------- ----------- ----------- --------- --------- -------------
Weighted average common and common equivalent
shares outstanding:
Primary.................................... 2,333 2,333 2,588 2,334 2,589 2,334
--------- ----------- ----------- --------- --------- -------------
--------- ----------- ----------- --------- --------- -------------
Fully diluted(1)........................... 2,333 2,333 2,700 2,334 2,589 2,334
--------- ----------- ----------- --------- --------- -------------
--------- ----------- ----------- --------- --------- -------------
SELECTED OPERATING DATA:
Gross profit as a percentage of sales.......... 30.7% 29.5% 33.2% 34.1% 35.7% 34.1%
Total catalogs mailed (000s)................... 12,698 21,886 39,312 54,436 42,908 28,344
Total active customers (000s)(2)............... 561 773 1,021 1,034 1,017 969
Income (loss) per advertising dollar(3)........ $ .09 $ .00 $ .24 $ (.06) $ .21 $ .05
BALANCE SHEET DATA:
Working capital (deficit)(4)................... $ 2,001 $ 1,296 $ 3,951 $ (2,463) $ 3,612 $ 652
Total assets................................... 8,623 14,546 21,179 23,709 27,890 28,491
Note payable--bank............................. -- -- -- 965 1,497 8,681
Subordinated notes payable..................... 660 1,160 3,660 3,414 3,414 3,414
Long-term liabilities excluding trade
creditors' obligation and subordinated notes
payable...................................... 102 740 379 287 678 204
Trade creditors' obligation.................... 785 785 635 -- -- --
Shareholders' equity........................... 1,048 570 3,292 1,548 3,875 1,476
<CAPTION>
SEPTEMBER 26,
1997
-------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Sales.......................................... $ 77,611
Cost of sales.................................. 47,234
-------------
Gross profit................................. 30,377
Selling, general and administrative expenses... 28,892
-------------
Earnings (loss) from operations.............. 1,485
Interest expense............................... (963)
Miscellaneous income (expense), net............ (4)
-------------
Earnings (loss) before income taxes.......... 518
Income taxes................................... (179)
-------------
Net earnings (loss).......................... $ 339
-------------
-------------
Net earnings (loss) per common and common
equivalent share:
Primary.................................... $ .12
-------------
-------------
Fully diluted(1)........................... $ .11
-------------
-------------
Weighted average common and common equivalent
shares outstanding:
Primary.................................... 2,888
-------------
-------------
Fully diluted(1)........................... 3,006
-------------
-------------
SELECTED OPERATING DATA:
Gross profit as a percentage of sales.......... 39.1%
Total catalogs mailed (000s)................... 39,557
Total active customers (000s)(2)............... 1,051
Income (loss) per advertising dollar(3)........ $ .09
BALANCE SHEET DATA:
Working capital (deficit)(4)................... $ 698
Total assets................................... 40,972
Note payable--bank............................. 13,256
Subordinated notes payable..................... 3,414
Long-term liabilities excluding trade
creditors' obligation and subordinated notes
payable...................................... 814
Trade creditors' obligation.................... --
Shareholders' equity........................... 4,229
</TABLE>
- ------------------------
(1) See Note A-12 in the Notes to Financial Statements.
(2) An "active customer" is defined as a customer who has purchased merchandise
from the Company within 12 months preceding the end of the period indicated.
(3) "Income (loss) per advertising dollar" is defined as earnings (loss) from
operations divided by advertising expense.
(4) Working capital at December 29, 1995 and September 26, 1997 reflects the
effect of the subordinated notes payable being classified as current
liabilities.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE FEDERAL SECURITIES LAWS. ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS DUE TO A NUMBER OF
FACTORS, INCLUDING GENERAL ECONOMIC CONDITIONS, A CHANGING MARKET ENVIRONMENT
FOR THE COMPANY'S PRODUCTS AND THE MARKET ACCEPTANCE OF THE COMPANY'S CATALOGS
AS WELL AS THE FACTORS SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS.
OVERVIEW
The Company is a leading mail order catalog retailer of value priced
outdoor, hunting and general merchandise. The Company's predecessor was founded
by Gary Olen in 1970 as a direct marketer focused on the deer hunter. The
Company's product offerings and marketing efforts have evolved to broaden the
Company's focus to include the value-oriented male in general, and the
outdoorsman in particular. In 1992, the Company instituted a value pricing
approach by which high quality products are sold at below normal retail prices.
The Company believes this value pricing approach has been the key factor in its
significant sales growth since that time, driving sales from $38 million in 1992
to $112 million in 1996. In 1994, the Company began to strengthen its management
team in an effort to capitalize on the opportunity represented by the recent
sales growth. The Company has added experienced direct marketing professionals
in each of its key functional areas over the past few years. The new management
team has focused on improving profitability by investing in advanced information
systems to allow better and more timely decision making, increasing emphasis on
higher margin manufacturers' close-outs and military surplus items and
implementing extensive cost control programs.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated information from
the Company's statements of operations expressed as a percentage of sales.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THIRTY-NINE WEEKS ENDED
------------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C>
DEC. 30, DEC. 29, DEC. 27, SEPTEMBER 27, SEPTEMBER 26,
1994 1995 1996 1996 1997
----------- ----------- ----------- --------------- ---------------
Sales................................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................................ 66.8 65.9 64.3 65.9 60.9
----- ----- ----- ----- -----
Gross profit....................................... 33.2 34.1 35.7 34.1 39.1
Selling, general and administrative expenses......... 29.4 35.3 32.1 33.2 37.2
----- ----- ----- ----- -----
Earnings (loss) from operations.................... 3.8 (1.2) 3.6 0.9 1.9
Interest expense..................................... 0.6 0.9 0.9 (1.0) (1.3)
----- ----- ----- ----- -----
Earnings (loss) before income taxes................ 3.2 (2.1) 2.7 (0.1) 0.6
Income taxes......................................... (0.4) 0.4 (0.7) -- (0.2)
----- ----- ----- ----- -----
Net earnings (loss)................................ 2.8% (1.7)% 2.0% (0.1)% 0.4%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 1997 COMPARED TO THE THIRTY-NINE WEEKS
ENDED SEPTEMBER 27, 1996
SALES. Sales for the thirty-nine weeks ended September 26, 1997 of $77.6
million were $8.3 million or 12.0% higher than sales of $69.3 million for the
same period last year. The increase in sales was due to a 40% increase in
catalog circulation, offset partially by the effects of a UPS strike in August
and September as well as lower customer response rates resulting from increased
catalog editions and the planned merchandising shift to higher margin products.
Although the Company is not dependent upon UPS to ship most of its products,
management believes the UPS strike and resulting publicity created a perception
16
<PAGE>
among buyers that orders could not be delivered or that delivery would be
significantly delayed. This perception resulted in a decrease in orders for the
Company's product offerings and therefore suppressed sales. The Company was
further affected when the overloaded U.S. Postal Service failed to deliver
catalogs on a timely basis, or at all, during and after the UPS strike.
Management believes that the UPS strike and related events negatively impacted
sales by approximately $2.5 million in the third quarter.
The Company mailed 22 catalog editions, including 14 specialty editions,
during the thirty-nine weeks ended September 26, 1997 compared to 17 catalog
editions, including eight specialty editions, during the same period last year.
Gross returns and allowances for the thirty-nine weeks ended September 26, 1997
were $9.0 million or 10.4% of gross sales compared to $6.0 million or 7.9% of
gross sales for the same period last year. The increase was anticipated as part
of the merchandising strategy to offer more products in the apparel and footwear
categories, which tend to have higher return rates than other product
categories.
GROSS PROFIT. Gross profit for the thirty-nine weeks ended September 26,
1997 was $30.4 million or 39.1% of sales compared to $23.6 million or 34.1% of
sales for the same period last year. The increase in gross profit as a percent
of sales was due primarily to higher retail product margins which were the
result of the Company's ongoing plan to shift a larger percentage of product
offerings to higher margin manufacturers' close-outs and military surplus as
well as apparel and footwear.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the thirty-nine weeks ended September 26, 1997 were
$28.9 million or 37.2% of sales compared to $23.0 million or 33.2% of sales for
the same period last year. The dollar increase was primarily due to the 40%
increase in circulation. Total circulation during the thirty-nine weeks ended
September 26, 1997 was 39.6 million catalogs compared to 28.3 million catalogs
during the same period last year. The increase in catalog circulation was
primarily due to a planned increase in the number of specialty catalogs editions
and increased efforts to develop new customers. Advertising expense for the
thirty-nine weeks ended September 26, 1997 was $17.0 million or 21.9% of sales
compared to $12.7 million or 18.3% of sales for the same period last year. The
increase as a percent of sales was primarily due to lower customer response
associated with the number of catalog editions mailed to existing customers, new
customer prospecting, and lower customer response rates which management
believes were caused by the UPS strike during the third quarter. The Company
recorded $100,000 of recovered merger costs during the thirty-nine weeks ended
September 26, 1997 compared to $218,000 of merger related expenses during the
same period last year. These expenses were incurred in connection with an
Agreement and Plan of Merger entered into in March 1996 among the Company, VISTA
2000, Inc. and VISTA Acquisition Subsidiary, Inc. The Company terminated the
agreement in May 1996 based upon various breaches of the agreement by VISTA
2000, Inc.
EARNINGS FROM OPERATIONS. Earnings from operations for the thirty-nine
weeks ended September 26, 1997 were $1.5 million or 1.9% of sales compared to
earnings from operations of $632,000 or 0.9% of sales for the same period last
year.
INTEREST EXPENSE. Interest expense for the thirty-nine weeks ended
September 26, 1997 was $963,000 compared to $714,000 for the same period last
year. The increase was primarily due to increased borrowings against the
revolving line of credit as a result of higher inventory levels.
INCOME TAXES. Income tax expense for the thirty-nine weeks ended September
26, 1997 was $179,000. No income tax benefit was recorded for the same period
last year due to a valuation allowance being recorded.
NET EARNINGS (LOSS). Net earnings for the thirty-nine weeks ended September
26, 1997 were $339,000 or 0.4% of sales compared to a net loss of $72,000 for
the same period last year.
17
<PAGE>
FISCAL YEAR ENDED DECEMBER 27, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 29,
1995
SALES. Sales for fiscal 1996 of $112.3 million were $10.5 million or 10.3%
higher than sales of $101.8 million for fiscal 1995. The increase in sales was
due to an increase in customer demand. The Company mailed 22 catalog editions,
including ten specialty editions, each year during 1996 and 1995. Gross returns
and allowances for fiscal 1996 were $10.2 million or 8.3% of gross sales
compared to $7.3 million or 6.7% of gross sales in fiscal 1995. This increase
was due to the merchandising strategy of offering more products in the apparel
and footwear categories, which tend to have higher return rates than other
product categories.
GROSS PROFIT. Gross profit for fiscal 1996 was $40.1 million or 35.7% of
sales compared to $34.7 million or 34.1% of sales in fiscal 1995. The increase
in gross profit as a percent of sales was due to higher retail product margins
which were the result of the strategic plan to shift a larger percentage of
product offerings to higher margin manufacturers' close-outs and military
surplus as well as apparel and footwear.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $36.0 million or 32.1% of sales during fiscal 1996
compared to $35.9 million or 35.3% of sales during fiscal 1995. The decrease as
a percent of sales was primarily the result of an improved circulation plan
which lowered advertising expense as a percent of sales, offset slightly by
higher spending in other expense categories. The Company's catalog circulation
strategy for 1996 was to control advertising costs by reducing its mailings from
the previous year. The Company made more informed mailing decisions during 1996
due to the implementation of improved customer demand monitors, the creation of
new segmentation models and the timely delivery of the Company's catalogs. Total
circulation during 1996 of 42.9 million catalogs represented a 21% decrease from
the 54.4 million catalogs mailed during 1995. Advertising expense for fiscal
1996 was $19.5 million or 17.4% of sales compared to $21.6 million or 21.2% of
sales for fiscal 1995. The decrease as a percent of sales was due to increased
customer demand.
EARNINGS (LOSS) FROM OPERATIONS. Earnings from operations were $4.1 million
or 3.6% of sales in fiscal 1996 compared to a loss from operations of $1.2
million during fiscal 1995.
INTEREST EXPENSE. Interest expense was $981,000 during fiscal 1996 compared
to $943,000 during fiscal 1995. The weighted average interest rate during 1996
was 10.6% compared to 9.2% during 1995 which reflected higher borrowing costs to
the Company in 1996 as a result of its performance in 1995.
INCOME TAXES. Income tax expense for fiscal 1996 was $759,000 compared to
an income tax benefit of $355,000 in fiscal 1995. The Company's effective tax
rate in 1996 was lower than the statutory tax rate due to the utilization of net
operating loss carryforwards and in 1995 was lower than the statutory rate due
to a valuation allowance being recorded. As of December 27, 1996, the Company
had fully utilized its net operating loss carryforwards.
NET EARNINGS (LOSS). Net earnings for fiscal 1996 were $2.3 million or 2.0%
of sales compared to a net loss of $1.7 million for fiscal 1995.
FISCAL YEAR ENDED DECEMBER 29, 1995 COMPARED TO FISCAL YEAR ENDED DECEMBER 30,
1994
SALES. Sales for fiscal 1995 of $101.8 million were $5.4 million or 5.6%
higher than sales of $96.4 million during fiscal 1994. The increase in sales was
a result of a 38% increase in total catalog mailings offset by lower than
anticipated customer demand. The Company mailed 22 catalog editions, including
ten specialty editions, during 1995 compared to 13 catalog editions, including
one specialty edition, during 1994. The lower than anticipated customer demand
was due to several late catalog mailings by the Company's printer and an overall
softness in the retail environment. Gross returns and allowances for fiscal 1995
were $7.3 million or 6.7% of gross sales compared to $6.8 million or 6.6% of
gross sales in fiscal 1994.
18
<PAGE>
GROSS PROFIT. Gross profit for fiscal 1995 was $34.7 million or 34.1% of
sales compared to $32.0 million or 33.2% of sales in fiscal 1994. The increase
in gross profit as a percent of sales was primarily due to the Company
increasing shipping and handling charges on outgoing parcels to its customers.
Retail product margins as a percent of sales were virtually unchanged from 1994.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $35.9 million or 35.3% of sales in fiscal 1995
compared to $28.3 million or 29.4% of sales in fiscal 1994. The dollar increase
was primarily due to higher catalog mailings and increases in building rent and
equipment depreciation associated with an increase in the capacity of the
computer system, telephone switch and warehouse in anticipation of sales growth.
The late catalog mailings affected the overall accuracy of the information used
in making mailing decisions, causing the Company to incur costs associated with
ineffective mailings. The increase as a percent of sales was primarily due to
lower than anticipated customer response on virtually all catalogs along with
higher postage and paper costs. Total circulation during 1995 of 54.4 million
catalogs represented a 38% increase compared to 39.3 million catalogs during
1994. Advertising expense for fiscal 1995 was $21.6 million or 21.2% of sales
compared to $15.4 million or 15.9% of sales for fiscal 1994. The increase as a
percent of sales was due to lower customer response rates.
EARNINGS (LOSS) FROM OPERATIONS. The Company incurred a loss from
operations of $1.2 million in fiscal 1995 compared to earnings from operations
of $3.7 million or 3.8% of sales in fiscal 1994.
INTEREST EXPENSE. Interest expense for fiscal 1995 was $943,000 compared to
$582,000 in fiscal 1994. The increase was primarily due to significantly
increased borrowings against the revolving line of credit throughout 1995
partially due to higher inventory levels.
INCOME TAXES. The income tax benefit for fiscal 1995 was $355,000 compared
to income tax expense of $385,000 in fiscal 1994. The Company's effective tax
rate in 1995 was lower than the statutory tax rate due to a valuation allowance
being recorded and in 1994 was lower than the statutory tax rate due to the
utilization of net operating loss carryforwards. At December 29, 1995, the
Company had net operating loss carryforwards of $3.8 million.
NET EARNINGS (LOSS). The net loss for fiscal 1995 was $1.7 million compared
to net earnings of $2.7 million or 2.8% of sales for fiscal 1994.
QUARTERLY FLUCTUATIONS AND SEASONALITY
The Company's sales and results of operations have fluctuated and can be
expected to continue to fluctuate on a quarterly basis as a result of a number
of factors, including: the timing of new merchandise and catalog offerings;
recognition of costs or sales contributed by new merchandise and catalog
offerings; fluctuations in response rates; fluctuations in postage, paper and
printing costs and in merchandise returns; adverse weather conditions that
affect response, distribution or shipping; shifts in the timing of holidays; and
changes in the Company's product mix. The Company recognizes the cost of catalog
production and mailing over the estimated useful lives of the catalogs, ranging
from four to six months from the catalog's in-home date. Consequently,
quarter-to-quarter sales and expense comparisons will be impacted by the timing
of the mailing of the Company's catalog editions.
The majority of the Company's sales historically occur during the third and
fourth fiscal quarters. The seasonal nature of the Company's business is due to
the catalog's focus on hunting merchandise and related accessories for the fall,
as well as winter apparel and gifts for the holiday season. The Company expects
this seasonality will continue in the future. In anticipation of increased sales
activity during the third and fourth fiscal quarters, the Company incurs
significant additional expenses for hiring additional employees and building
inventory levels. Management believes that sales during the third quarter of
fiscal 1997 were negatively impacted by the UPS strike and related events.
19
<PAGE>
The following table sets forth certain unaudited quarterly financial
information for the Company for the periods shown. In the opinion of management,
this unaudited information has been prepared on the same basis as the audited
information and includes all normal recurring adjustments necessary to present
fairly, in all material respects, the information set forth therein.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FISCAL 1995
Sales............................................................... $ 23,859 $ 17,612 $ 24,579 $ 35,782
Gross profit........................................................ 8,624 5,707 8,269 12,095
Earnings (loss) from operations..................................... 276 (1,209) (844) 548
Net earnings (loss)................................................. 90 (1,046) (771) (17)
FISCAL 1996
Sales............................................................... $ 24,177 $ 18,611 $ 26,485 $ 42,997
Gross profit........................................................ 8,077 6,311 9,261 16,421
Earnings (loss) from operations..................................... 239 (248) 641 3,424
Net earnings (loss)................................................. 80 (471) 319 2,399
FISCAL 1997
Sales............................................................... $ 27,876 $ 23,245 $ 26,490
Gross profit........................................................ 10,516 9,181 10,680
Earnings (loss) from operations..................................... 1,192 462 (169)
Net earnings (loss)................................................. 625 70 (356)
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically met its operating cash requirements through
funds generated from operations and borrowings under its revolving line of
credit and from subordinated notes payable to shareholders and other investors.
The Company had working capital of $391,000 as of September 26, 1997,
compared to working capital of $3.6 million as of December 27, 1996 and negative
working capital of $2.5 million as of December 29, 1995. The increase of $6.1
million in working capital during 1996 was primarily the result of the Company's
improved profitability during 1996 and the renewal of the $3.4 million in
subordinated notes payable, maturing June 1998. The decrease of $3.2 million in
working capital during the thirty-nine weeks ended September 26, 1997 was the
result of the $3.4 million in subordinated notes payable being classified as a
current liability as of September 26, 1997, partially offset by year-to-date
earnings. The Company's working capital requirements have increased during the
thirty-nine weeks ended September 26, 1997 compared to the same period last year
primarily as a result of higher inventory levels and lower inventory turnover
which are consistent with the Company's strategic plan to increase product
margins through purchasing more manufacturers' close-outs. The Company purchases
large quantities of manufacturers' close-outs and other individual product items
on an opportunistic or when-available basis, particularly in the case of
footwear and apparel. The seasonal nature of the merchandise or the time of its
acquisition may require that it be held for several months before being offered
in a catalog. This can result in increased inventory levels and lower inventory
turnover, thereby increasing the Company's working capital requirements and
related carrying costs.
In November 1995, the Company began offering its customers an installment
credit plan with no finance fees, known as the "G.O. Painless 4-Pay Plan." Each
of the four consecutive monthly installments is billed directly to customers'
credit cards. The Company had installment receivables of $1.7 million at
September 26, 1997 compared to $2.3 million at December 27, 1996 and $1.2
million at December 29, 1995. The installment plan will continue to require the
allocation of working capital which the Company expects to fund from operations
and availability under its revolving credit facility.
20
<PAGE>
On April 18, 1997, the Company entered into an Amended and Restated Credit
and Security Agreement with Norwest Business Credit, Inc. increasing its
revolving line of credit from $10.0 million to $15.0 million, subject to an
adequate borrowing base, and extending the expiration date to May 2000. The
amended credit facility increased the limit for letters of credit to $5.0
million and the interest rate was reduced to the bank's prime rate. In September
1997, the Company further amended its credit facility to provide a revolving
line of credit up to $16.5 million, subject to an adequate borrowing base. The
additional $1.5 million of availability expired on December 15, 1997. All other
terms and conditions remained substantially the same as in the previous
agreement. The Company was in compliance with the credit agreement's covenants
as of September 26, 1997. As of September 26, 1997, the Company had borrowed
$13.3 million against the revolving credit line compared to $1.5 million at
December 27, 1996 and $965,000 at December 29, 1995. The increase during the
thirty-nine weeks ended September 26, 1997 was due to the $11.8 million increase
in inventory required to support the merchandising plan.
Cash flows used in operating activities for the thirty-nine weeks ended
September 26, 1997 were $10.7 million compared to $6.8 million for the same
period last year. The increase in cash flows used in operating activities was
primarily the result of increased inventory levels. Cash provided by operating
activities during fiscal 1996 was $662,000 compared to $1.3 million during
fiscal 1995. The net decrease in cash provided by operating activities resulted
primarily from an increase of $3.6 million in inventory and a decrease in
accounts payable, partially offset by the improved profitability of the Company
and an increase in accrued liabilities.
Cash used in investing activities during the thirty-nine weeks ended
September 26, 1997 was $1.0 million compared to $895,000 for the same period
last year and $1.1 million in fiscal 1996 compared to $1.8 million in fiscal
1995. During 1994, the Company began a multi-year project of replacing and
enhancing its operational and management information systems which has resulted
in significant capital expenditures being incurred each year to develop computer
software programs. Additionally, the Company has made investments to enhance
warehouse operations in terms of efficiencies and capacity. The Company has
continued the system development plan with additional hardware and software
upgrades totaling $668,000 for the thirty-nine weeks ended September 26, 1997
which have been funded from operations.
The Company believes that its available cash after this offering together
with cash flow from operations and borrowing capacity under its revolving credit
facility will be sufficient to fund operations and future growth for the next 12
months.
21
<PAGE>
BUSINESS
OVERVIEW
The Company is a leading mail order catalog retailer of value priced
outdoor, hunting and general merchandise primarily marketed to the outdoorsman.
The Company's broad selection of products are sold through distinctive main and
specialty catalogs which are advertised as The "Fun-to-Read"
Catalog.-Registered Trademark- The Company offers a large selection of high
value products at low prices including footwear, clothing and accessories,
hunting and shooting accessories, camping and outdoor recreation equipment,
optics, collectibles and gift items as well as a diverse range of additional
offerings in other product categories. In recent years, the Company has
aggressively pursued a strategy to provide manufacturers' close-outs of name
brand shoes, boots, apparel and general merchandise as well as military surplus
from around the world.
The Company's business was started in 1970 by Gary Olen, the Company's
President and Chief Executive Officer. Originally serving the deer hunter, the
Company's product offerings and marketing efforts have evolved to broaden the
Company's focus to include the value-oriented male in general, and the
outdoorsman in particular. In 1992, the Company began its value pricing strategy
of offering hunting and shooting equipment at discount prices, later adding
military surplus, manufacturers' close-outs and other lines of high value, high
margin merchandise that appeal to a broader group of customers. Due in large
part to the success of these strategies, the Company's sales have increased from
$38 million in 1992 to $112 million in 1996.
INDUSTRY AND MARKET
The catalog shopping industry has experienced substantial growth over the
past several years. According to industry reports, from 1992 to 1996 U.S.
consumer catalog sales volume grew at a rate of approximately 8% annually to an
estimated $46 billion in 1996. The U.S. consumer catalog industry is expected to
reach sales of at least $62 billion by 2001. Between 1992 and 1996, U.S. catalog
sales growth outpaced that of the retail industry. Of the total U.S. adult
population, 57% or 110 million adults shopped from catalogs in 1996. An industry
source estimates the size of the adult catalog shopper market will reach 158
million by 2001, up 44% from 1996. The Company believes that catalog sales will
continue to increase due to the convenience and time savings of catalog
shopping.
The majority of the Company's sales fall within two large product segments
of the U.S. catalog market: apparel and sporting goods. Together, the apparel
and sporting goods segments represent approximately 27% of the total dollar
volume of catalog sales in the United States.
Since most direct mail catalogs are targeted to women, the Company believes
the male catalog customer is an underserved segment of the market that
represents a significant opportunity. The proportion of men who are catalog
shoppers is increasing. Recent industry data suggest that 52% of men in the U.S.
bought from catalogs during 1996, up from 38% in 1994.
The Company believes that its niche marketing focus on the value-oriented
outdoorsman, together with its product offerings and growing sales of general
merchandise to men, has positioned it to continue to take advantage of
opportunities within this large and expanding market.
BUSINESS STRATEGY
The Company's objective is to maximize its niche of selling by direct mail
value priced outdoor and general merchandise. Key elements of the Company's
business strategy include:
EXPAND AND CAPITALIZE ON THE VALUE-ORIENTED MALE NICHE. The Company seeks
to expand its customer base and capitalize on its value-oriented male market
niche through increased circulation of its specialty catalogs, name acquisition
programs and new product offerings.
OFFER QUALITY, NAME BRAND AND UNIQUE PRODUCTS AT VALUE PRICING. The Company
offers high quality, name brand products along with unique and unusual products,
all at value pricing. The Company offers a
22
<PAGE>
changing mix of products which are hand picked and field tested to ensure
quality and maximize customer appeal.
PROVIDE A FUN AND CONVENIENT SHOPPING EXPERIENCE. The Company strives to
provide a fun and convenient shopping experience by combining its entertaining
catalog format with the convenience of direct mail shopping. The Company
emphasizes customer service and maintains sophisticated order entry and
fulfillment operations for efficient processing of customer orders.
MANAGE BY PROACTIVELY USING INFORMATION SYSTEMS. The Company proactively
uses its information systems in merchandising, marketing and list management to
test, assess and adjust day-to-day as well as long-term operating activities.
Timely, comprehensive information allows the Company to alter product mix in
future catalogs, adjust circulation plans, select target customers and change
prices on particular products in response to consumer preferences.
CAPITALIZE ON THE COMPANY'S FLEXIBLE STRUCTURE AND SHORT CATALOG LEAD
TIME. The Company's short catalog lead time (approximately 60 days) gives it a
high degree of flexibility to make changes in upcoming catalogs based on
up-to-date information. This enables the Company to manage its business on a
catalog by catalog, page by page, product by product basis to determine future
product offerings and the most profitable customer segments to target.
CATALOGS
The Company publishes main and specialty editions of The Sportsman's Guide
catalog. The Company mailed approximately 61 million catalogs to existing and
prospective customers in 1997.
FORMAT. The Company's catalogs are designed to be fun and entertaining.
Every catalog uses a highly promotional format that features various items at
sale prices. Unique to the Company is its product description, or copy. The
catalogs make creative and expansive use of art and copy to extensively describe
products with humorous text, call-outs, photos, photo captions and caricatures.
Copy is written in the first person from Gary Olen to the reader. The catalogs
are perceived by customers as having entertainment value and are advertised as
The "Fun-to-Read" Catalog.-Registered Trademark- Excerpts from the catalogs have
been featured in Jay Leno's "Headlines" segment on The Tonight Show. The copy
has also been singled out for its excellence by various publications within the
direct mail industry.
TYPES AND PURPOSES. Main catalog editions are mailed monthly and offer
selections of the Company's best selling products in a variety of product
categories. Main catalogs generate the majority of the Company's sales. The
Company also uses its main catalog as its primary prospecting catalog to test
new names and new products. Response data from main catalog mailings is used to
create specialty catalogs. New customers continue to receive monthly main
catalogs in addition to specialty catalogs featuring the product categories in
which they have shown an interest through past purchases.
Specialty catalogs contain wide selections of products from a single product
category. The Company identifies the product categories for its specialty
catalogs based on demand generated for certain categories in the Company's main
catalogs. The Company first tested the specialty catalog concept in 1994 and
found it to be successful. The Company has since developed the concept into
numerous specialty editions. During 1997, the Company published 18 specialty
catalogs targeting buyers of footwear and apparel, deer hunting equipment,
ammunition and shooting supplies, military surplus, camping equipment and
holiday gifts. The Company plans to continue to develop and test new specialty
titles.
The specialty titles allow the Company to utilize a customized marketing
plan for individual consumer groups thereby maximizing response rates and
minimizing advertising costs as a percentage of sales. The Company believes that
its specialty catalog titles have been an important component in its sales
growth and have allowed the Company to expand its sales to existing customers
and to broaden sales to new customers beyond the Company's historical customer
profile.
23
<PAGE>
CREATION. All catalogs are created and designed in-house by the Company's
creative services department which produces the advertising copy and layouts for
each catalog. Substantially all of the photographs used in the catalogs are
taken at the Company's in-house photo studio. Artwork and copy for the catalog
are transmitted in digital format from the Company's desktop publishing systems
to a pre-press vendor and then to the printer, which prints and mails the
catalogs. These capabilities allow the Company to preserve the catalog's
distinctive character and allow the Company greater control of the catalog
production schedule, which reduces the lead time necessary to produce catalogs.
The Company is able to prepare and mail a catalog in approximately 60 days,
which allows it to offer new merchandise quickly to its customers, thereby
maximizing pricing opportunities while minimizing inventory carrying costs. The
Company believes this turnaround time is one of the fastest in the direct
marketing industry. Because the Company uses a value-oriented sales approach,
the Company is able to use a lower weight and grade of paper than its
competitors to reduce its catalog production costs.
MERCHANDISING
The Company's products originally were limited to a small selection of
merchandise targeted to the deer hunter. The Company's product offerings have
gradually evolved to a broader range of merchandise intended to appeal to the
value-oriented outdoorsman. The Company offers a changing mix of products from
catalog to catalog.
PRODUCTS. The Company's products include footwear, clothing and
accessories, hunting and shooting accessories, camping and outdoor recreation
equipment, optics and ammunition as well as a diverse range of offerings in
other product categories. The Company sells high value, low price, name brand
products, as well as unique and unusual products which appeal to its targeted
customer base and provide value to customers. The following graph shows the
Company's sales by product category for 1997:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Footwear 24.5%
Clothing and Accessories 22.4%
Hunting and Shooting Accessories 9.9%
Camping and Outdoor Recreation 8.4%
Optics 7.8%
Ammunition 5.7%
Domestics 4.3%
Novelty and Collectibles 4.1%
Hardware, Tools and Automotive 3.3%
Electronics 2.9%
Knives 2.2%
Other 4.5%
</TABLE>
24
<PAGE>
MERCHANDISE MIX. The Company historically offered a changing mix of in-line
products. In-line products are those products regularly available from
manufacturers. As a complement to its value pricing approach, in 1996 the
Company began aggressively pursuing manufacturers' close-outs of name brand
shoes, boots, clothing, watches and other merchandise, which it offers to its
customers at savings of 25% to 60% from original retail prices. The Company also
offers military surplus from around the world, providing customers a low-cost
alternative for items such as wool coats and pants, shirts, gloves, underwear,
blankets, boots, sleeping bags, jackets, backpacks, skis and snowshoes.
The Company's merchandising strategy has been to shift its merchandise mix
to a larger percentage of manufacturers' close-outs, military surplus and other
higher margin product categories including apparel and footwear, and to reduce
the number of lower price point items, while maintaining a broad selection of
products. This strategy has added to the Company's customer base value-oriented
purchasers who may not otherwise be identified as pure outdoorsmen. This
strategy has also contributed to significant increases in the Company's overall
gross profit margins.
SOURCING. The Company's buyers actively seek sources for products they
believe will interest the Company's targeted customers. The Company seeks to
maintain existing and develop new relationships with vendors to provide ongoing
access to manufacturers' close-outs, military surplus and other items. Buyers
regularly attend trade shows, meet with vendors and make mass mailings and cold
calls to locate high quality, low price, name brand merchandise as well as
unusual or unique products. The Company frequently purchases large quantities of
close-outs and other individual items on an opportunistic or when-available
basis. The capability to purchase large quantities in a short time period makes
the Company a unique and desirable outlet for manufacturers looking to sell
overstocked or discontinued products.
The Company purchases its merchandise from more than 1,000 suppliers and
generally purchases all of its product needs for a particular item from one
vendor. No single supplier accounted for more than 10% of the Company's
purchases during 1997, and the Company believes there are numerous sources for
products in its merchandise categories.
SELECTION. The Company's buyers and merchandising staff along with Gary
Olen collectively select the merchandise to be offered to customers by
evaluating product availability, pricing, historical demand, emerging
merchandise trends and expected product profitability. Each product is
hand-picked, and most are field tested by Company buyers to ensure quality,
functionality and proper sizing in order to maximize appeal to customers.
INVENTORY MANAGEMENT. Once merchandise has been selected, the Company's
rebuyers are responsible for ordering all merchandise, determining the quantity
and arrival date, managing inventory levels, assessing customer demand,
adjusting estimates, cancelling orders for slow-moving merchandise and
reordering merchandise. Utilizing the Company's information systems, buyers and
rebuyers meet seven days following each catalog mailing to monitor product sales
and take responsive action. Slow-moving merchandise is actively promoted through
telemarketing, clearance sales, package stuffers or, when possible, is returned
to the vendor.
As part of its merchandise liquidation strategy, the Company maintains a
retail outlet store at its warehouse and distribution facilities in South St.
Paul, and opened a second retail store in Moundsview, Minnesota in 1997, from
which it sells discontinued, overstocked, returned and regular catalog
merchandise. The retail stores provide a liquidation outlet and serve to
minimize inventory mark-downs.
CATALOG CONTENT. The merchandise offered in the catalogs is determined
based on product availability and the catalog in-home delivery date.
Manufacturers' close-outs are offered when available. Close-outs and military
surplus merchandise purchased in large quantities are normally placed in the
Company's main catalogs. If a supply of merchandise is limited, it is usually
offered in a specialty catalog or is included in a multiple page insert in the
main catalog mailed to a targeted customer segment. Numerous products are
25
<PAGE>
shown on each page giving the catalog a dense look and adding to the Company's
value-oriented image. Product sales are analyzed item by item to identify trends
and help plan future merchandise offerings.
MARKETING
The Company's marketing programs are based on gathering, analyzing and
organizing information on its customers. The Company believes that because it
offers such a broad mix of merchandise, it is particularly important for it to
fully understand its customers.
CUSTOMER DATABASE. The Company maintains a proprietary customer database in
which it stores detailed information on each customer in the Company's customer
list, including demographic data and purchasing history. The Company's customer
database contains over 3.6 million house names, including over one million
customers who have made purchases within the last 12 months. The customer
database is updated regularly with information as new purchases are recorded.
CUSTOMER SEGMENTATION. The Company has developed its own customer
segmentation models to segment its customer list according to many variables,
allowing the Company's marketing department to analyze each segment's buying
patterns. The Company statistically validates the results of each of its catalog
mailings. The data is used to further segment the customer database to refine
the frequency and selectivity of the Company's catalog mailings in an effort to
maximize response rates and profitability.
LIST DEVELOPMENT. The Company's new customer acquisition program is
designed to cost-effectively identify and capture new customers that fit its
customer profile. New customers are acquired principally through the use of
targeted mailings to individuals identified through mailing lists rented or
exchanged from other catalog companies, retail subscription lists, and lists of
names compiled from businesses whose customers have interests similar to those
of the Company's customers. The Company is generally entitled to make one
mailing to each name obtained through a rented or exchanged mailing list. If the
prospect responds, the name is added to the Company's database and may be freely
used by the Company in the future. The Company is also pursuing new sources of
prospective customers, such as those who request catalogs through advertising,
through the Company's web site or from customer referrals. New customers
accounted for approximately 18% of the Company's sales during 1997.
Once new customers are acquired, the Company's objective is to maximize the
long-term profit potential from these customers. With ongoing refinements in the
Company's approach to merchandising and marketing, the Company has increased the
frequency and quantity of mailings to the most profitable segments of its
existing customer list. Demographic and regression analyses of historical
purchasing patterns of existing customers, including recency, frequency and
monetary modeling, are performed to assist in merchandising and customer
targeting and to increase sales to existing customers. Existing customers
accounted for approximately 82% of the Company's sales during 1997.
MARKETING PROGRAMS AND PROMOTIONAL FORMATS. The Company strives to develop
promotional formats that will stimulate customer purchases. Successful
promotional formats include catalog cover designs, different catalog covers (or
wraps), free gifts and promotional tag lines such as "last chance" offers.
The Company employs a disciplined approach to its marketing activities. The
Company tests a sample of new names before mailing to a new customer group,
tests price and shipping charge changes, tests new list sources and tests
marketing programs and promotional formats before full-scale implementation to
ensure customer acceptance and cost-effectiveness. Two significant, successful
marketing programs implemented by the Company are a buyer's club and an
installment payment plan.
- BUYER'S CLUB. The Company's buyer's club offers its members exclusive
merchandise not offered to other customers as well as a merchandise
discount of 10% on regularly priced items and 5% on sale items and special
buys. Customers can purchase a one year membership in the Company's
buyer's club for a $29.99 fee, or a two or three year membership for a fee
of $53.99 and $80.99, respectively.
26
<PAGE>
- INSTALLMENT PAYMENT PLAN. The Company's installment payment plan, known as
the "G.O. Painless 4-Pay Plan," is available to credit card customers with
orders of $50 or more. Payments under the plan consist of 25% of the
merchandise charges (plus 100% of any shipping charges and buyer's club
fees, if applicable) at the time of shipment with three equal installments
in 30 day increments, which are automatically charged to the customer's
credit card. No interest or additional fees are charged by the Company to
customers who elect the 4-Pay Plan.
CUSTOMER SERVICE. A key element of the Company's marketing strategy is its
commitment to customer service. The Company has a toll-free customer service
telephone line separate from its inbound ordering lines. The Company maintains a
separate customer service department staffed with full-time customer service
representatives who answer customer inquiries, reply to complaints and assist
customers in returning merchandise. The customer service department personally
responds to all customer correspondence. The Company's commitment to customer
service is supported by its unconditional guarantee which allows customers to
return merchandise for any reason and at any time for refund or exchange if they
are not satisfied with the merchandise.
WEB SITE. The Company maintains a web site which allows customers to
request catalogs and provides information on special product offerings. Although
customers cannot order merchandise from the web site, customers can e-mail the
Company with questions about products, pricing and availability. The Company is
collecting e-mail addresses and plans to use e-mail communications in its future
marketing efforts. The address of the Company's web site is
www.sportsmansguide.com.
OPERATIONS AND FULFILLMENT
INBOUND CALLS. The Company maintains an in-house call center. Approximately
75% of customer orders are placed through the Company's toll-free telephone
lines which are staffed 24 hours per day, seven days a week, with the remaining
25% of orders received by mail or facsimile. The Company's telephone system
consists of an expandable AT&T GR3 digital switch which currently has ten T-1
lines. Computer telephony integration software identifies the caller and, if
known, accesses the customer's records simultaneously with answering the call.
When fully staffed, the Company has the capacity of handling up to 2,500 calls
per hour on average, and the Company believes that its current capacity is
sufficient to handle demand in the foreseeable future.
The Company also contracts with an outside call center to handle calls on an
as-needed basis. If calls become backlogged or in the event of telephone system
failure, back-up systems and rerouting capabilities allow the outside call
center to handle inbound telephone orders. The outside call center has access to
inventory availability, mirrors existing call processing and allows the Company
to maintain its call standards.
OUTBOUND TELEMARKETING. The Company maintains a small outbound
telemarketing department as part of its telephone sales operations.
Telemarketers contact existing customers who have previously purchased
collectibles and supply items such as ammunition to offer them similar products.
Outbound telephone sales accounted for approximately 1% of the Company's sales
during 1997.
ORDER ENTRY. The Company's telemarketing department is staffed with
individuals who are familiar with the products offered in the catalogs and can
offer assistance to customers on availability, color, size and other
information. Telemarketers use a catalog sales system with pre-written
merchandise descriptions and sales offers and are provided monetary incentives
to sell additional merchandise to customers who order by phone. During 1997,
add-on sales averaging $10 per order were made to approximately 28% of all
inbound phone orders.
Processing of customer orders is coordinated and handled by the Company's
on-line order entry system. Telephone orders are entered directly into the
system. Mail orders are batched and, after payment is verified, are then entered
into the system. The system is also used in connection with all other order
27
<PAGE>
entry and fulfillment tasks including credit authorization, order picking and
packing and shipment. During 1997, the Company's on-line order processing system
handled in excess of 1.7 million orders.
CREDIT AND PAYMENT TERMS. Customers can pay for orders by check or major
credit card. Orders are shipped after credit card charges are approved or checks
are received. Charges are not billed to customer credit cards until the orders
are ready for shipment.
PICKING AND PACKING. Through its fulfillment and delivery methods, the
Company strives to be a low cost operator in the direct mail industry. The
Company uses an integrated computer-driven picking, packing and shipping system.
The system edits orders and generates warehouse pick tickets and packing slips.
Packers are provided monetary incentives to ensure accuracy of orders, which has
contributed to the Company's distribution accuracy rate in excess of 99% during
1997. During its peak season, the Company normally ships in excess of 20,000
packages in a single shift. The Company believes it has sufficient additional
capacity available for the foreseeable future which can be utilized by adding
more shifts and working days.
SHIPPING. The Company promises next business day shipping on orders
received by 7 p.m. for in-stock merchandise. Virtually all of the Company's
merchandise is stocked at, and shipped from, its facility in South St. Paul,
Minnesota, although a small percentage of merchandise is drop-shipped directly
to the customer by specific vendors. The Company primarily utilizes the U.S.
Postal Service and, to a lesser extent, UPS for shipment of merchandise to
customers. Ammunition, which accounted for approximately 5.7% of the Company's
sales in 1997, is shipped exclusively via UPS. The Company utilizes a
consolidating shipper for delivery of merchandise to the U.S. Postal Service. A
shipping fee is charged on each customer order based on the total dollar amount
ordered. The Company will expedite shipping for an additional fee. The Company's
fulfillment system automatically determines the lowest cost method of shipping
each order.
INVENTORY CONTROL. The Company's merchandise mix results in the Company
maintaining a broad selection of products as well as large quantities of
individual products. Consequently, inventory management is an important
component of its operations. The Company employs a cycle count (perpetual
inventory) procedure which eliminates wall-to-wall physical counts and resulted
in 99.6% inventory accuracy during 1997.
RETURNS. The Company maintains an unconditional return policy which permits
customers to return merchandise for any reason at any time for refund or
exchange. Returned merchandise is restocked, sold in the retail outlets,
returned to the supplier or scrapped. Returns processors are provided monetary
incentives to ensure accuracy of returns processing.
SEASONAL STAFFING. The Company adjusts the number of employees to meet
variable demand levels, particularly during the peak selling season, which
includes the months of November and December. To meet increased order volume
during the Company's peak selling season, the Company hires a significant number
of temporary employees.
INFORMATION SYSTEMS AND TECHNOLOGY
The Company has developed an integrated management information system which
the Company expects to be fully redundant by the second quarter of 1998. In
addition to on-line order entry and processing, the information system also
provides support for merchandising, inventory management, marketing and
financial and management reporting. The on-line access to information allows
management to monitor daily trends and the performance of merchandise and
planning functions.
The Company's main hardware platform is the IBM RISC 6000 series of
computers. The Company uses a Unidata database operating system. The Company
believes that its recent investment in the IBM RISC 6000 processors and its
operating system will provide the Company with an adequate platform to
28
<PAGE>
support its growth plan. Based on an internal review, the Company believes its
systems are year 2000 compliant.
COMPETITION
The direct marketing industry includes a wide variety of specialty and
general merchandise retailers in a highly competitive and fragmented business
environment. The Company sells its products to customers in all 50 states and
competes in the purchase and sale of merchandise with all retailers. The Company
believes that no competitor offers as comprehensive a selection of products at
discount prices. However, there are other mail order catalogs as well as
discount retailers that offer similar products to those found in the Company's
catalogs. Examples of other outdoor/hunting catalogs include Bass Pro Shops Inc.
and Cabela's Inc. Although these catalogs may compete with the Company in
certain product categories, none focuses directly on the value-oriented
outdoorsman niche. Discount retailers, such as Wal-Mart Stores, Inc. or Kmart
Corporation, offer selected products similar to those found in the Company's
catalogs. See "Risk Factors--Competition."
REGULATION
The Company is subject to federal, state and local laws and regulations
which affect its catalog mail order operations. Federal Trade Commission
regulations, in general, govern the manner in which orders may be solicited, the
information which must be provided to prospective customers, the time in which
orders must be shipped, obligations to customers if orders are not shipped
within the time promised, and the time in which refunds must be paid if the
ordered merchandise is unavailable or if it is returned. In addition, the
Federal Trade Commission has established guidelines for advertising and labeling
many of the products sold by the Company.
The Company is also subject to a variety of state laws and regulations
relating to, among other things, advertising, pricing, charging and collecting
state sales or use tax and product safety/restrictions. Some of these laws
prohibit or limit the sale, in certain states or localities, of certain items
offered in the Company's catalogs such as black powder firearms, ammunition,
bows, knives and similar products. State and local government regulation of
hunting can also affect the Company's business. See "Risk Factors--Government
Regulation."
SERVICE MARKS
The Company's service marks "The Sportsman's Guide" and "The 'Fun-to-Read'
Catalog" have been registered with the United States Patent and Trademark
Office. "The Sportsman's Guide" mark has also been registered in Canada.
EMPLOYEES
As of December 7, 1997, the Company employed 1,018 individuals, including
full-time and part-time associates. During 1997, the Company's seasonal
employment ranged from a high of approximately 1,060 employees (plus an
additional 70 temporary workers) in November to a low of approximately 590
employees in early June. None of the Company's employees are currently covered
by a collective bargaining agreement. The Company considers its employee
relations to be good.
PROPERTIES
The Company's executive offices, warehouse and distribution facilities are
located at 411 Farwell Avenue, South St. Paul, Minnesota. The Company leases
approximately 320,000 square feet at this facility under a triple net lease
expiring March 1999. The lease includes a three year renewal option at fair
market value rental rates. The Company conducts all of its catalog operations at
this facility, which also includes a retail outlet store from which it sells
discontinued, overstocked, returned and regular catalog merchandise.
29
<PAGE>
The Company is exploring alternative sites for its operations in the event its
lease is not renewed. The Company also leases approximately 14,000 square feet
in Moundsview, Minnesota where it opened a second retail outlet store in 1997.
The Company believes its facilities are sufficient for its current operating
plan.
LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings other than
litigation which is incidental to its business and which the Company believes is
not material.
30
<PAGE>
MANAGEMENT
DIRECTORS AND OFFICERS
Set forth below is certain information about the Company's directors and
officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------- --- ----------------------------------------------------------------------
<S> <C> <C>
Vincent W. Shiel, 64 Chairman of the Board(1)(2)
Ph.D.................
Gary Olen.............. 55 President, Chief Executive Officer and Director(1)
Gregory R. Binkley..... 49 Executive Vice President, Chief Operating Officer and Director
Charles B. Lingen...... 53 Senior Vice President of Finance, Chief Financial Officer, Secretary,
Treasurer and Director
William G. Luth........ 47 Senior Vice President of Marketing
John M. Casler......... 47 Vice President of Merchandising
Barry W. Benecke....... 52 Vice President of Creative Services
Bernard S. Bauhof...... 50 Vice President of Information Systems and Technology
Leonard M. Paletz...... 62 Director(2)(3)
Mark F. Kroger......... 44 Director(3)
William T. Sena........ 60 Director(1)(2)(3)
</TABLE>
- ------------------------
(1) Member of Executive Committee
(2) Member of Compensation Committee
(3) Member of Audit Committee
VINCENT W. SHIEL, PH.D. has been a director of the Company since 1990 and
was elected Chairman of the Board in 1994. Dr. Shiel owns an interest in and
serves as a director of ABN Sports Supply, Inc. ("ABN Sports"), a wholesale
firearms distributor. Dr. Shiel is a principal shareholder and has served as
President and a director of Outdoor Consulting, Inc., a management consulting
firm, since 1988. From 1984 to 1988, Dr. Shiel served on the board of directors
and owned a controlling interest in Gander Mountain, Inc. ("Gander Mountain"),
then a retail mail order catalog company specializing in outdoor sporting
equipment. Dr. Shiel resigned as a director of and sold his controlling interest
in Gander Mountain in 1988. Dr. Shiel was the principal owner and President of
Outdoor Sports Headquarters, Inc., a hunting and sporting goods wholesaler, from
its formation in the early 1960s until 1978.
GARY OLEN is a co-founder of the Company and served as its Executive Vice
President and Secretary from its incorporation in 1977 until December 31, 1993.
Mr. Olen was elected President and Chief Executive Officer of the Company in
1994. Mr. Olen has been a director of the Company since its incorporation. From
1970 to 1977, Mr. Olen was employed as the Marketing Director for Fidelity File
Box, Inc. ("Fidelity File Box"), which sells corrugated storage products, office
and industrial equipment and office industrial supplies through mail order
catalogs. From 1967 to 1970, Mr. Olen was a Merchandise Manager with C&H
Distributors, a business-to-business mail order catalog specializing in the sale
of industrial and office equipment. From 1960 to 1967, Mr. Olen was employed in
the catalog division of J.C. Penney Company. Mr. Olen was also the sole
proprietor of the predecessor of the Company, The Olen Company, founded in 1970.
GREGORY R. BINKLEY has been a director of the Company since 1995. Mr.
Binkley has been employed by the Company since February 1994 and was elected
Vice President in April 1994, Senior Vice President of Operations and Chief
Operating Officer in 1995 and Executive Vice President in 1996. From 1993 to
1994, Mr. Binkley served as an independent operations consultant. From 1990 to
1993, Mr. Binkley was employed by Fingerhut Companies, Inc. ("Fingerhut"), a
mail order catalog business, as Director of Distribution. From 1988 to 1990, Mr.
Binkley was Director of Distribution with Cable Value Network, Inc., a cable
television retailer. From 1975 to 1988, Mr. Binkley was employed by Donaldsons
Department
31
<PAGE>
Stores, a division of Allied Stores Corporation, serving as Vice President of
Finance and Operations from 1987 to 1988 and Vice President of Operations from
1981 to 1987.
CHARLES B. LINGEN has been a director of the Company since 1995. Mr. Lingen
has been employed by the Company since May 1994 as its Chief Financial Officer,
Vice President of Finance and Treasurer, in 1995 was elected Secretary and in
1996 was elected Senior Vice President of Finance. From 1973 to 1994, Mr. Lingen
was employed by Fingerhut, serving as Vice President of Finance and Controller
from 1989 to 1994.
WILLIAM G. LUTH has been employed by the Company since June 1995, was
elected Vice President of Marketing in December 1995 and in 1996 was elected
Senior Vice President of Marketing. Mr. Luth was employed by Fingerhut from 1994
to 1995 as General Manager Motorsports Marketing, served as an independent
consultant to two direct marketing catalog firms from 1993 to 1994, was employed
by Lands' End, Inc., a mail order catalog business, from 1992 to 1993 as
Managing Director/Canada and was employed by Fingerhut from 1982 to 1992 where
he served in various marketing and management positions including Vice President
Marketing--Figi's Inc. from 1991 to 1992, Director--Telemarketing from 1989 to
1990 and Director--Customer List Marketing from 1985 to 1989.
JOHN M. CASLER has been employed by the Company since January 1996 and was
elected Vice President of Merchandising in January 1997. Mr. Casler was employed
by Gander Mountain from 1989 to 1995, where he served as Division Merchandise
Manager from 1990 to 1995. Prior to that time, Mr. Casler held merchandise
management positions at Munson Sporting Goods Co., Inc. from 1985 to 1989 and at
the Target Stores Division of Dayton Hudson Corp. from 1982 to 1985.
BARRY W. BENECKE has been employed by the Company since July 1996 as Senior
Director--Creative Services and was elected Vice President of Creative Services
in July 1997. Mr. Benecke was employed by CyDeCosse Inc., a direct marketing
company, from 1990 to 1996 as Vice President of Creative Services, and Fingerhut
from 1983 to 1990 as Creative Director. Prior to 1983, Mr. Benecke managed his
own advertising/design firm for 13 years.
BERNARD S. BAUHOF has been employed by the Company since July 1996 as Senior
Director-- Information Systems and Technology and was elected Vice President of
Information Systems and Technology in July 1997. Mr. Bauhof was employed by
CyDeCosse Inc. from 1994 to 1996 as Director of Information Systems, by The
MusicLand Group, Inc. from 1990 to 1994 as Director of Distributed Systems, by
Zetaco Inc., a manufacturer of optical disc servers, from 1988 to 1990 as
Director of Software Engineering and by CPT Corporation, a network printing
company, from 1980 to 1988 as Software Engineering Director.
LEONARD M. PALETZ is a co-founder of the Company and served as Chairman of
the Board, Chief Executive Officer, Treasurer and a director from the Company's
incorporation in 1977 until 1994. Mr. Paletz resigned his offices of Chairman of
the Board, Chief Executive Officer and Treasurer in May 1994, and retired as an
employee of the Company effective December 31, 1994. Mr. Paletz also served as
the Company's President from its incorporation through December 31, 1993. From
1962 to 1977, Mr. Paletz was employed by Fidelity File Box in various positions
including Vice President and General Manager and was also a director and
shareholder of Fidelity File Box.
MARK F. KROGER has been a director of the Company since 1990. He is the
former Chairman of the Board, President, Chief Executive Officer and Treasurer
of ABN Sports. Mr. Kroger served as President and a director of ABN Sports from
1987 to December 1997. Mr. Kroger also served as the Chairman of the Board,
President and Chief Executive Officer of LMV, Inc. dba Ohio Powder Company, a
wholesale distributor of gun powder, from 1995 to December 1997 and as the
President and a director of MKS Supply, Inc., a marketer and seller of firearms
to distributors, from 1993 to December 1997. Mr. Kroger was employed by Outdoor
Sports Headquarters, Inc. from 1973 to 1985 where he held various positions in
sales and merchandising.
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<PAGE>
WILLIAM T. SENA has been a director of the Company since 1990. He is an
investment advisor with Sena Weller Rohs Williams, Inc., an investment advisory
firm. Mr. Sena has been associated with such investment advisory firm and its
predecessor since 1965. Mr. Sena is also a director of Phoenix Medical
Technology, Inc.
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid to the Chief
Executive Officer and to each of the other executive officers of the Company
whose total annual salary and bonus for fiscal 1996 exceeded $100,000 (the
"Named Executive Officers") for services rendered in all capacities to the
Company for each of the fiscal years indicated.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
-------------------- ------------
SALARY BONUS OPTIONS
NAME AND PRINCIPAL POSITION YEAR ($) ($) (#)
- ------------------------------------------------------------ ------- --------- --------- ------------
<S> <C> <C> <C> <C>
Gary Olen .................................................. 1996 137,127 158,000 38,950
President and Chief Executive Officer 1995 126,253 -- --
1994 125,000 95,571 21,875
Gregory R. Binkley ......................................... 1996 103,275 86,500 21,210
Executive Vice President and Chief 1995 98,269 -- --
Operating Officer 1994(1) 76,827 47,785 5,313
Charles B. Lingen .......................................... 1996 97,218 79,500 17,670
Senior Vice President of Finance, Chief Financial Officer 1995 90,816 -- --
and Secretary/Treasurer 1994(2) 49,759 19,114 1,875
William G. Luth ............................................ 1996 94,311 79,500 17,670
Senior Vice President of Marketing 1995(3) 42,489 -- --
</TABLE>
- ------------------------
(1) Mr. Binkley was employed by the Company in February 1994. Salary paid in
1994 consists of amounts paid from such date to the end of the fiscal year.
(2) Mr. Lingen was employed by the Company in May 1994. Salary paid in 1994
consists of amounts paid from such date to the end of the fiscal year.
(3) Mr. Luth was employed by the Company in June 1995. Salary paid in 1995
consists of amounts paid from such date to the end of the fiscal year.
33
<PAGE>
STOCK OPTIONS
The following table sets forth information with respect to the Named
Executive Officers concerning the grant of options during fiscal 1996.
OPTION GRANTS IN FISCAL 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
----------------------------------------------------------------------------
POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE OR FOR OPTION TERM(2)
OPTIONS IN FISCAL BASE PRICE EXPIRATION --------------------
NAME GRANTED (#) YEAR(3) ($/SH) DATE 5%($) 10%($)
- ----------------------------------- ----------- ------------- ------------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Gary Olen.......................... 38,950 31.2% 2.50 10/21/06 61,239 155,191
Gregory R. Binkley................. 21,210 17.0% 2.50 10/21/06 33,347 84,508
Charles B. Lingen.................. 17,670 14.1% 2.50 10/21/06 27,781 70,404
William G. Luth.................... 17,670 14.1% 2.50 10/21/06 27,781 70,404
</TABLE>
- ------------------------
(1) All options were granted under the Company's 1996 Stock Option Plan and
became exercisable July 16, 1997.
(2) The compounding assumes a ten-year exercise period for all option grants.
The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of the Company's future
Common Stock prices. These amounts represent certain assumed rates of
appreciation only. Actual gains, if any, on stock option exercises are
dependent on the future performance of the Common Stock and overall stock
market conditions. The amounts reflected in this table may not necessarily
be achieved.
(3) During fiscal 1996, the Company granted employees options to purchase an
aggregate of 125,000 shares of Common Stock.
The following table sets forth information with respect to the Named
Executive Officers concerning options held at fiscal year end 1996. None of the
Named Executive Officers exercised any options during fiscal 1996.
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 27, 1996(#) DECEMBER 27, 1996($)(1)
---------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE
- ----------------------------- ----------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
Gary Olen.................... 21,875 93,950 -- --
Gregory R. Binkley........... 5,313 21,210 -- --
Charles B. Lingen............ 1,875 17,670 -- --
William G. Luth.............. -- 17,670 -- --
</TABLE>
- ------------------------
(1) None of the options were "in-the-money" at the end of fiscal 1996.
(2) The Named Executive Officers were granted certain options under the
Company's 1996 Stock Option Plan as described in "Option Grants in Fiscal
1996," which options became exercisable upon shareholder approval on July
16, 1997, and accordingly, as of December 29, 1997, of the options listed
above, Mr. Olen has 60,825 exercisable options and 55,000 unexercisable
options and all of such options held by Messrs. Binkley, Lingen and Luth are
exercisable.
34
<PAGE>
1997 STOCK OPTION GRANTS
On April 18, 1997, the Board of Directors granted options to purchase an
aggregate of 130,000 shares of Common Stock under the Company's 1996 Stock
Option Plan to certain employees of the Company, including grants to the
following senior management personnel: Gary Olen--33,790 shares; Gregory R.
Binkley--20,740 shares; Charles B. Lingen--15,420 shares; William G.
Luth--17,250 shares; and John M. Casler--10,000 shares. The options vest in four
cumulative installments of 25% commencing on the date of grant and on each
anniversary of the date of grant and expire on the tenth anniversary of the date
of grant. The options have an exercise price of $4.00 per share, which was
slightly in excess of the average of the bid and asked price of the Common Stock
on the date of grant.
On July 1, 1997, the Board of Directors approved the grant of options to
purchase 220,000 shares of Common Stock to officers of the Company contingent
upon the completion of this offering as follows: Mr. Olen--50,000 shares; Mr.
Binkley--59,500 shares; Mr. Lingen--34,000 shares; Mr. Luth--42,500 shares; and
Mr. Casler--34,000 shares. The exercise price of each option will be the Price
to Public set forth on the cover page of this Prospectus. The options will vest
in four cumulative installments of 25% commencing on the date of grant and on
each anniversary of the date of grant and will expire on the tenth anniversary
of the date of grant.
EMPLOYMENT AGREEMENTS
The Company entered into employment agreements in 1997 with Gary Olen,
Gregory R. Binkley, Charles B. Lingen, William G. Luth and John M. Casler to
continue their employment in their present positions at their current annual
base salary levels. Mr. Olen's agreement continues until December 31, 2001, and
Messrs. Binkley's, Lingen's, Luth's and Casler's agreements continue until
December 31, 1998. Such agreements contain certain nondisclosure,
nonsolicitation and option forfeiture provisions. Each agreement is
automatically renewed for additional one year terms unless either party gives
two months' notice of nonrenewal, and terminates upon the employee's death,
disability or retirement at age 65. Upon termination of the agreement by reason
of death or disability, each of the employees or his estate is entitled to a
payment equal to 12 months of his monthly base salary, plus a pro rata portion
of the bonus that would otherwise have been payable to the employee under the
Company's bonus plan then in effect. Upon termination of the agreement (i) by
the employee for good reason (as defined in the agreement) or (ii) by the
Company without good cause or upon the Company's failure to renew the agreement,
the employee is entitled to a payment equal to 24 months of his monthly base
salary, plus a pro rata portion of the bonus that would otherwise have been
payable to the employee under the Company's bonus plan then in effect. Each
agreement also provides that if the employee is terminated, or resigns for good
reason or if the Company fails to renew the agreement within two years following
a substantial event (defined as a sale of substantially all of the Company's
assets, a merger or other reorganization resulting in the incumbent directors
constituting less than a majority of the board, or a tender offer for 50% or
more of the Company's outstanding voting stock), such employee is entitled to a
payment equal to three times his annual base salary, plus a pro rata portion of
the bonus otherwise payable to the employee.
DIRECTOR COMPENSATION
The Company currently does not pay directors fees. Directors are reimbursed
for out-of-pocket expenses incurred in attending board meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors is comprised of Vincent
W. Shiel, Leonard M. Paletz and William T. Sena. Mr. Paletz is a former Chief
Executive Officer of the Company. During fiscal 1996 and the thirty-nine weeks
ended September 26, 1997, the Company purchased merchandise inventory in the
amounts of $3.0 million and $1.3 million, respectively, from ABN Sports.
35
<PAGE>
Dr. Shiel is a shareholder and director of ABN Sports. Mark F. Kroger was a
shareholder, Chairman of the Board, President, Chief Executive Officer and
Treasurer of ABN Sports during 1997. The Company believes that the terms of such
purchases were as favorable as could have been obtained from an unrelated party.
Outdoor Consulting, Inc., a corporation owned by Dr. Shiel, provides certain
consulting services to the Company. In addition, Dr. Shiel, Mr. Paletz and Mr.
Kroger hold subordinated notes payable which will be paid in full, and Dr. Shiel
and Mr. Kroger own shares of Series A Preferred Stock which will be repurchased
by the Company, upon completion of this offering. See "Certain Transactions."
CERTAIN TRANSACTIONS
In January 1990, the Company entered into a Consulting Agreement with
Outdoor Consulting, Inc., pursuant to which Outdoor Consulting, Inc. provides
consulting services to the Company. The initial term of the agreement expired on
December 31, 1990; however, the agreement continues on a year-to-year basis
until terminated by either party upon 60 days prior written notice. The initial
compensation payable under the agreement was $4,000 per month. Effective January
1, 1997, the compensation payable under this agreement was increased to $5,000
per month. Vincent W. Shiel is the sole shareholder and employee of Outdoor
Consulting, Inc.
In February 1994, the Company issued $3.2 million of subordinated notes
payable in a private placement transaction with certain shareholders of the
Company, including Vincent W. Shiel, Leonard M. Paletz and Mark F. Kroger.
Pursuant to the terms of the notes, interest was payable quarterly at the rate
of 8% and the entire principal amount was payable in February 1996 and was
subsequently extended until May 1996. Of the entire financing, $2.5 million
represented additional funds provided to the Company to meet certain working
capital needs, $500,000 represented a rollover of the payment of short-term
promissory notes issued in June 1993, $167,000 represented a rollover of the
principal payments due in January 1994 for a subordinated note payable and
$80,000 represented a rollover of a principal payment due to Mr. Paletz.
Warrants to purchase 324,680 shares of Common Stock of the Company, at an
exercise price of $1.88, were attached to the promissory notes issued in 1994.
In May 1996, the Company issued $3.4 million of subordinated notes payable
in a private placement to replace and renew the 1994 financing and certain other
subordinated notes payable. These notes bear interest at 1.75% over prime, but
not less than 9% (10.25% at December 29, 1997), payable quarterly. Pursuant to
the terms of these subordinated notes payable, the entire principal amount is
due June 15, 1998. The holders of the subordinated notes payable (and principal
amount) include: Vincent W. Shiel and his wife ($986,074); Frederick J. Kroger
($723,334); Ralph E. Heyman, as trustee under various trusts for the benefit of
Dr. and Mrs. Shiel and their children and grandchildren ($397,260); William T.
Sena, as trustee under a trust for the benefit of Dr. and Mrs. Shiel and their
children ($200,000); Leonard M. Paletz ($180,095); Stuart A. Shiel ($100,000);
Mark F. Kroger ($31,667); and all others ($795,000). Warrants to purchase
341,347 shares of Common Stock of the Company, at an exercise price of $1.81,
were attached to these subordinated notes payable. The subordinated notes
payable are collateralized by the assets of the Company subordinate to liens
securing borrowings under the Company's revolving credit facility. The Company's
aggregate interest expense during 1996 for all of these financings was $317,000.
The subordinated notes payable will be paid in full upon completion of this
offering using a portion of the net proceeds from this offering.
The 20,000 shares of the Company's Series A Preferred Stock currently
outstanding were issued for an aggregate purchase price of $200,000 ($10.00 per
share) in 1990 in connection with the Company's plan of reorganization under
Chapter 11 of the Bankruptcy Code. The holders of the Series A Preferred Stock
(and number of shares) include: Dr. and Mrs. Shiel (10,000 shares); Frederick J.
Kroger (3,000 shares); Mark J. Kroger (1,000 shares); and all others (6,000
shares). See "Principal and Selling Shareholders." The Board of Directors of the
Company has determined that it is in the best interests of the Company to
36
<PAGE>
repurchase the Series A Preferred Stock in connection with this offering.
Because the terms of the Series A Preferred Stock do not contain any provision
for its repurchase, the Board of Directors has determined that the fair value of
the Series A Preferred Stock is equal to the maximum amount payable under the
terms of the Series A Preferred Stock upon a liquidation, dissolution or winding
up of the Company. See "Description of Capital Stock--Series A Preferred Stock."
Based upon the formula contained in the terms of the Series A Preferred Stock,
such amount is equal to $50.00 per share, or an aggregate of $1,000,000. One of
the factors considered by the Board of Directors in making this determination
was the fact that the holders of the Series A Preferred Stock would have
received such maximum amount in connection with the proposed merger of the
Company with VISTA 2000, Inc. in 1996 which was never consummated.
Gary Olen holds an option to purchase 55,000 shares of Common Stock at an
exercise price of $2.50 per share which will become exercisable upon completion
of this offering and will expire six months thereafter. The Board of Directors
has approved a loan to Mr. Olen in an amount necessary to pay the aggregate
exercise price for the option and the income taxes payable by Mr. Olen upon
exercise of the option. The loan will be for a term of five years, will bear
interest at the mid-term applicable federal rate (6.02% for December 1997) and
will be collateralized by a pledge of the shares acquired upon exercise.
37
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock and Series A Preferred Stock
as of December 29, 1997 by each director and Named Executive Officer of the
Company, all directors and executive officers as a group, each person known by
the Company to beneficially own more than 5% of the Common Stock or Series A
Preferred Stock and each Selling Shareholder, and as adjusted to give effect to
the sale of shares offered hereby.
<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP
OF COMMON
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP STOCK
OF COMMON STOCK OF PREFERRED STOCK COMMON AFTER THE
PRIOR TO OFFERING PRIOR TO OFFERING SHARES OFFERING(1)
------------------------- ------------------------- BEING ----------
NAME NUMBER PERCENT(2) NUMBER PERCENT OFFERED(1) NUMBER
- --------------------------------- ---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE
OFFICERS(3):
Vincent W. Shiel(4).............. 692,353 27.3% 10,000 50.0% 109,413 582,940
Gary Olen(5)..................... 152,456 6.3 -- -- -- 219,956
Gregory R. Binkley(6)............ 41,708 1.8 -- -- -- 56,583
Charles B. Lingen(7)............. 23,400 1.0 -- -- -- 31,900
William G. Luth(8)............... 21,983 * -- -- -- 32,608
Leonard M. Paletz(9)............. 260,420 10.9 -- -- 45,822 214,598
Mark F. Kroger(10)............... 107,836 4.6 1,000 5.0 20,424 87,412
William T. Sena, as trustee of
various trusts for the benefit
of Dr. and Mrs. Shiel and their
children(11)................... 128,000 5.4 -- -- 19,258 108,742
All directors and executive
officers as a group
(8 persons)(12)................ 1,428,156 51.4 11,000 55.0 194,917 1,334,739
OTHER SHAREHOLDERS OWNING MORE
THAN 5% AND SELLING
SHAREHOLDERS:
Ralph E. Heyman, individually and
as trustee of various trusts
for the benefit of Dr. and Mrs.
Shiel and their children and
grandchildren(13).............. 497,488 20.4 -- -- 87,056 410,432
Stuart A. Shiel(14).............. 183,334 7.8 -- -- 35,741 147,593
Deryl L. Patterson(15)........... 17,499 * -- -- 3,828 13,671
Frederick J. Kroger(16).......... 188,636 7.7 3,000 15.0 20,424 168,212
Susan M. Mills(17)............... 117,819 5.0 -- -- -- 117,819
Susan M. Mills Charitable
Remainder Unitrust, Marshall &
Ilsley Trust Company of
Florida, Trustee(18)........... 65,819 2.8 3,920 19.6 37,611 28,208
Frederic H. Mayerson(19)......... 63,833 2.7 1,000 5.0 10,211 53,622
Philip H. Steiner(20)............ 35,253 1.5 500 2.5 5,106 30,147
Richard H. Steiner(21)........... 35,253 1.5 500 2.5 5,106 30,147
<CAPTION>
NAME PERCENT(2)
- --------------------------------- ----------
<S> <C>
DIRECTORS AND EXECUTIVE
OFFICERS(3):
Vincent W. Shiel(4).............. 14.0%
Gary Olen(5)..................... 5.4
Gregory R. Binkley(6)............ 1.4
Charles B. Lingen(7)............. *
William G. Luth(8)............... *
Leonard M. Paletz(9)............. 5.4
Mark F. Kroger(10)............... 2.2
William T. Sena, as trustee of
various trusts for the benefit
of Dr. and Mrs. Shiel and their
children(11)................... 2.7
All directors and executive
officers as a group
(8 persons)(12)................ 29.7
OTHER SHAREHOLDERS OWNING MORE
THAN 5% AND SELLING
SHAREHOLDERS:
Ralph E. Heyman, individually and
as trustee of various trusts
for the benefit of Dr. and Mrs.
Shiel and their children and
grandchildren(13).............. 10.1
Stuart A. Shiel(14).............. 3.7
Deryl L. Patterson(15)........... *
Frederick J. Kroger(16).......... 4.2
Susan M. Mills(17)............... 3.0
Susan M. Mills Charitable
Remainder Unitrust, Marshall &
Ilsley Trust Company of
Florida, Trustee(18)........... *
Frederic H. Mayerson(19)......... 1.3
Philip H. Steiner(20)............ *
Richard H. Steiner(21)........... *
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
38
<PAGE>
(FOOTNOTES FOR PRECEDING PAGE)
- ------------------------
* Less than 1% of outstanding shares
(1) Assumes no exercise of the Underwriters' over-allotment option. If the
Underwriters' over-allotment option is exercised in full, the number of
shares owned after the offering and the percentage of ownership for Vincent
W. Shiel would be 500,881 shares and 12.0%; for Leonard M. Paletz would be
180,232 shares and 4.5%; for Mark F. Kroger would be 72,094 shares and
1.8%; for William T. Sena, as trustee, would be 94,302 shares and 2.3%; for
all directors and executive officers as a group would be 1,188,556 shares
and 26.3%; for Ralph E. Heyman, individually and as trustee, would be
345,139 shares and 8.5%; for Stuart A. Shiel would be 120,787 shares and
3.0%; for Frederick J. Kroger would be 152,894 shares and 3.8%; for Susan
M. Mills Charitable Remainder Unitrust would be 0 shares and 0.0%; for
Frederic H. Mayerson would be 45,963 shares and 1.2%; for Deryl L.
Patterson would be 10,798 shares and less than 1%; for Philip H. Steiner
would be 26,317 shares and less than 1%; and for Richard H. Steiner would
be 26,317 shares and less than 1%. The Company plans to repurchase all
outstanding shares of Series A Preferred Stock upon completion of this
offering. See "Use of Proceeds."
(2) Percentages are calculated on the basis of the number of shares outstanding
on December 29, 1997, plus the number of shares issuable pursuant to
options and warrants held by the individual which are exercisable within 60
days after December 29, 1997. Percentages after the offering reflect the
exercise of warrants to purchase 20,424 shares (35,742 shares if the
Underwriters' over-allotment option is exercised in full) for sale to the
Underwriters in this offering by a Selling Shareholder.
(3) The address of each director and executive officer of the Company is 411
Farwell Avenue, South St. Paul, Minnesota 55075.
(4) Includes 572,351 common shares (147,348 of which represent shares issuable
upon the exercise of warrants) held in the name of Dr. Shiel as Trustee of
the Vincent W. Shiel Revocable Trust and 120,002 common shares (45,001 of
which represent shares issuable upon the exercise of warrants) held in the
name of Helen M. Shiel, wife of Dr. Shiel, as Trustee of the Helen M. Shiel
Revocable Trust. Does not include 824,321 common shares (157,652 of which
represent shares issuable upon the exercise of warrants) held by Dr. and
Mrs. Shiel's children or in trusts for the benefit of Dr. and Mrs. Shiel
and their children and grandchildren, of which Dr. Shiel expressly
disclaims beneficial ownership. Preferred share number includes 7,500
shares held in the name of Dr. Shiel as Trustee of the Vincent W. Shiel
Revocable Trust and 2,500 shares held in the name of Helen M. Shiel as
Trustee of the Helen M. Shiel Revocable Trust.
(5) Includes 69,273 shares issuable upon the exercise of options prior to this
offering and 136,773 shares issuable upon the exercise of options upon the
completion of this offering.
(6) Includes 2,000 shares held in the name of Mr. Binkley's wife, 31,708 shares
issuable upon the exercise of options prior to this offering and 46,583
shares issuable upon the exercise of options upon the completion of this
offering.
(7) Includes 23,400 shares issuable upon the exercise of options prior to this
offering and 31,900 shares issuable upon the exercise of options upon the
completion of this offering.
(8) Includes 21,983 shares issuable upon the exercise of options prior to this
offering and 32,608 shares issuable upon the exercise of options upon the
completion of this offering.
(9) Includes 46,020 shares issuable upon the exercise of warrants.
(10) Includes 14,501 common shares issuable upon the exercise of warrants.
39
<PAGE>
(11) Includes 128,000 shares (of which 40,000 shares are issuable upon the
exercise of warrants) held as trustee of various trusts for the benefit of
Dr. and Mrs. Shiel and their children, of which Mr. Sena has no pecuniary
interest.
(12) Includes 439,234 common shares issuable upon the exercise of warrants and
options prior to this offering and 540,734 common shares issuable upon the
exercise of warrants and options upon the completion of this offering.
(13) Includes 495,488 shares (of which 97,652 shares are issuable upon the
exercise of warrants) held as trustee of various trusts for the benefit of
Dr. and Mrs. Shiel and their children and grandchildren, of which Mr.
Heyman has no pecuniary interest. Mr. Heyman's address is 1100 Courthouse
Plaza, S.W., Dayton, Ohio 45402.
(14) Includes 20,000 shares issuable on the exercise of warrants held for his
own account. Does not include (i) 56,000 shares held by Mr. Heyman as
trustee of a trust for the benefit of Mr. Shiel, of which Mr. Shiel
expressly disclaims beneficial ownership and (ii) an aggregate of 184,863
shares (of which 12,198 shares are issuable upon the exercise of warrants)
held by Mr. Heyman as trustee of various trusts for the benefit of children
of Mr. Shiel, of which Mr. Shiel expressly disclaims beneficial ownership.
Mr. Shiel is the son of Dr. Shiel. Mr. Shiel's address is 1926 Rankin Road,
#110, Houston, Texas 77073.
(15) Does not include (i) 44,000 shares held by Mr. Sena as trustee of a trust
for the benefit of Ms. Patterson, of which Ms. Patterson expressly
disclaims beneficial ownership, (ii) 4,000 shares issuable upon the
exercise of warrants held by Mr. Heyman as trustee of a trust for the
benefit of Ms. Patterson, of which Ms. Patterson expressly disclaims
beneficial ownership and (iii) an aggregate of 176,625 shares (of which
7,454 shares are issuable upon the exercise of warrants) held by Mr. Heyman
as trustee of various trusts for the benefit of Ms. Patterson's children,
of which Ms. Patterson expressly disclaims beneficial ownership. Ms.
Patterson is the daughter of Mrs. Shiel. Ms. Patterson's address is 9770
Baymeadows Road, Suite 113, Jacksonville, Florida 32256.
(16) Includes 1,501 common shares issuable upon the exercise of warrants held
for his own account and 93,800 common shares issuable upon the exercise of
warrants held as a co-trustee of various trusts for the benefit of his
grandchildren. Mr. Kroger will exercise warrants to purchase 20,424 common
shares (35,742 common shares if the Underwriters' over-allotment option is
exercised in full) for sale to the Underwriters in this offering. Mr.
Kroger is the father of Mark F. Kroger. Mr. Kroger's address is 500 Bruton
Circle, Kettering, Ohio 45429.
(17) Includes 11,760 shares issuable upon the exercise of warrants. Ms. Mills'
address is 630 Hay Avenue, Brookville, Ohio 45309.
(18) Marshall & Ilsley Trust Company of Florida's address is 800 Laurel Oak
Drive, Suite 101, Naples, Florida 34108.
(19) Includes 17,168 common shares issuable upon the exercise of warrants. Mr.
Mayerson's address is 7585 Ridge Road, Cincinnati, Ohio 45237.
(20) Includes 11,918 common shares issuable upon the exercise of warrants.
Philip Steiner's address is 1112 Fort View Place, Cincinnati, Ohio 45202.
(21) Includes 11,918 common shares issuable upon the exercise of warrants.
Richard Steiner's address is 4044 Rose Hill Avenue, Cincinnati, Ohio 45229.
40
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 36,800,000 shares of
Common Stock, par value of $.01 per share, 200,000 shares of Series A Preferred
Stock, par value $.01 per share, and 3,000,000 undesignated shares. The
following description of the Company's capital stock is qualified in its
entirety by reference to the Company's Restated Articles of Incorporation, its
Bylaws and the Minnesota Business Corporation Act ("MBCA").
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters to be voted on by the shareholders and are entitled to
cumulate their votes for the election of directors. Under cumulative voting,
each shareholder has the right to cast that number of votes equal to the number
of shares held by the shareholder multiplied by the number of directors to be
elected and such shareholder may cast all of the shareholder's votes for a
single candidate or distribute the shareholder's votes among any number of
candidates in any proportion the shareholder chooses. Because of cumulative
voting, shareholders owning less than a majority of the outstanding shares of
Common Stock may be able to elect one or more directors.
Subject to the rights of holders of Series A Preferred Stock and any
undesignated shares, each share of Common Stock is entitled to participate
equally in any distribution of the net assets made to the shareholders in
liquidation of the Company and is entitled to participate equally in dividends
if and when declared by the Board of Directors. The Company's Restated Articles
of Incorporation further empower the Board of Directors to authorize a dividend
or distribution of shares of Common Stock or any other class or series PRO RATA
to the holders of the same or any other class or series of shares. There are no
redemption, sinking fund, conversion or preemptive rights with respect to the
Common Stock unless, with respect to any undesignated shares, the Board of
Directors grants preemptive rights. The outstanding shares of Common Stock are,
and the Shares offered by the Company hereby when issued will be, fully paid and
nonassessable.
Under the Restated Articles of Incorporation, the voting shareholders of the
Company have the power, by affirmative vote of the holders of a majority of the
voting power of all shares entitled to vote: (a) when required by law, to
authorize the sale, lease, exchange or other disposition of all or substantially
all of the Company's property and assets, including its goodwill, not in the
usual and ordinary course of business; (b) when required by law, to adopt an
agreement or plan of exchange or merger; (c) to amend the Restated Articles of
Incorporation; or (d) to dissolve the Company; provided that such actions are
subject to a veto by shareholders owning more than 40% of the voting power of
all shareholders entitled to vote.
SERIES A PREFERRED STOCK
Except as otherwise required by law, shares of Series A Preferred Stock have
no voting rights. The holders of Series A Preferred Stock are entitled to
receive, when and as declared by the Board of Directors, dividends at the same
rate per share of Series A Preferred Stock as dividends are paid to holders of
Common Stock. In the event of any liquidation, dissolution or winding up of the
Company (including any acquisition of the Company by merger or other form of
reorganization or a sale of substantially all the assets of the Company), the
holders of Series A Preferred Stock then outstanding are entitled to be paid out
of funds available for distribution to shareholders an amount per share equal to
the value of the liquidation proceeds times a fraction, the numerator of which
is 19.4483 and the denominator of which is the number of shares of Common Stock
then outstanding (2,333,600 shares as of July 1, 1997, the date the Company's
Board of Directors approved the repurchase of the Series A Preferred Stock),
provided that solely for purposes of calculating the liquidation preference, the
liquidation proceeds shall not exceed $6,000,000. After setting apart or paying
in full the liquidation preference to the holders of Series A Preferred Stock,
the holders of Common Stock share ratably in all remaining assets available for
distribution to shareholders to the exclusion of the holders of Series A
Preferred Stock.
41
<PAGE>
As of the date of this Prospectus, there were 20,000 shares of Series A
Preferred Stock outstanding, all of which will be repurchased by the Company
upon completion of this offering using a portion of the net proceeds of this
offering. See "Use of Proceeds" and "Certain Transactions."
UNDESIGNATED SHARES
The Board of Directors, without action by the shareholders, is authorized to
establish and designate classes or series of the undesignated shares and to fix
the relative rights and preferences of such classes or series of shares
(including terms with respect to redemption, sinking fund, dividend,
liquidation, preemptive, conversion and voting rights and preferences).
Accordingly, the Board of Directors, without shareholder approval, may issue
undesignated shares with terms that could adversely affect the voting power and
other rights of the holders of Common Stock.
The existence of the undesignated shares may have the effect of discouraging
an attempt, through acquisition of a substantial number of shares of Common
Stock, to acquire control of the Company with a view to effecting a merger, sale
or exchange of assets or a similar transaction. The anti-takeover effects of the
undesignated shares may deny shareholders the receipt of a premium on their
Common Stock and may also have a depressive effect on the market price of the
Common Stock.
As of the date of this Prospectus, no undesignated shares have been issued
or authorized for issuance.
MINNESOTA TAKEOVER STATUTES
Section 302A.673 of the MBCA generally prohibits an "issuing public
corporation" from entering into certain business combination transactions with
any "interested shareholder" (generally defined as any person other than the
corporation or its subsidiaries beneficially owning at least 10% of the voting
stock of the corporation), unless a committee composed of disinterested
directors from the corporation's board of directors approves the business
combination prior to the date the interested shareholder became an interested
shareholder. The shareholders of a Minnesota corporation may amend the articles
of incorporation or bylaws under certain circumstances to opt out of these
provisions. The Company's Restated Articles of Incorporation and Bylaws do not
opt out of these provisions.
Section 302A.671 of the MBCA provides that all shares of an issuing public
corporation acquired above specified thresholds are deemed "control shares."
Unless a proposed acquisition of control shares is approved by (i) the
affirmative vote of the holders of a majority of the voting power of all shares
entitled to vote including all shares held by the acquiring person and (ii) the
affirmative vote of the holders of a majority of the voting power of all shares
entitled to vote excluding all interested shares, and the proposed acquisition
is consummated within 180 days after such shareholder approval, the control
shares are denied voting rights and may be redeemed by the corporation. As
permitted by the MBCA, the Company's Restated Articles of Incorporation provide
that the provisions of the MBCA relating to control share acquisitions do not
apply to the Company.
TRANSFER AGENT
The transfer agent and registrar for the Company's Common Stock is Corporate
Stock Transfer, Inc., Denver, Colorado.
SHARES ELIGIBLE FOR FUTURE SALE
As of December 29, 1997, the Company had outstanding 2,339,225 shares of
Common Stock, which does not include: (i) the 1,600,000 Shares offered by the
Company hereby, (ii) 348,439 shares of Common Stock issuable upon the exercise
of outstanding options, (iii) 220,000 shares of Common Stock issuable upon the
exercise of options granted contingent upon the completion of this offering or
(iv) 716,027 shares of Common Stock issuable upon the exercise of warrants (of
which 20,424 shares for sale in this offering will be issued pursuant to the
exercise of warrants by a Selling Shareholder) which must be exercised or will
expire 30 days after this offering.
42
<PAGE>
Of the shares of Common Stock outstanding as of December 29, 1997 (other
than the 400,000 Shares offered by the Selling Shareholders hereby),
approximately 411,086 shares are not subject to the lock-up agreements described
below and are freely tradeable pursuant to Rule 144(k) or other exemptions from
registration under the Securities Act of 1933. In connection with this offering,
all directors, officers and certain other shareholders of the Company have
agreed not to offer, sell or otherwise dispose of a total of 1,548,563 shares
held by them (in addition to all shares issuable upon exercise of options and
warrants held by them as described below) for a period of 180 days from the
effective date of this offering, without the prior written consent of Cruttenden
Roth Incorporated. After such 180 day period, all shares beneficially owned by
such directors, officers and certain other shareholders of the Company will be
eligible for sale in the public market in accordance with Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who is an affiliate of the Company and any person
who has beneficially owned restricted shares for at least one year is entitled
to sell in the public market within any three month period a number of shares
that does not exceed the greater of 1% of the then outstanding shares of Common
Stock or the average weekly trading volume of the Common Stock during the four
calendar weeks preceding the filing of a notice of the proposed sale with the
Securities and Exchange Commission. Sales under Rule 144 are also subject to
certain manner-of-sale provisions, notice requirements and the availability of
current public information about the Company. A person who is deemed not to have
been an affiliate of the Company at any time during the 90 calendar days
preceding a sale by such person and who has beneficially owned restricted shares
for at least two years, would be entitled to sell such shares in the public
market under Rule 144 without regard to the foregoing restrictions and
requirements.
The Securities and Exchange Commission has proposed further revisions to the
holding periods and volume limitations contained in Rule 144. The adoption of
amendments effecting such proposed revisions may result in resales of restricted
securities sooner than would be the case under Rule 144 as currently in effect.
However, there can be no assurance of when, if ever, such amendments will be
proposed or adopted.
The Company has registered under the Securities Act of 1933 a total of
739,878 shares of Common Stock reserved for issuance under the Company's 1996
Stock Option Plan, 1994 Nonqualified Performance Option Plan, 1993 Executive
Stock Option Plan and 1991 Incentive Stock Option Plan. Shares issued upon the
exercise of outstanding options under the Plans will generally be available for
immediate resale in the public market. As of December 29, 1997, options to
purchase an aggregate of 348,439 shares at exercise prices ranging from $2.50 to
$8.70 per share were held by 28 individuals under the Plans, including options
for 149,615 shares held by Gary Olen, options for 47,263 shares held by Gregory
R. Binkley, options for 34,965 shares held by Charles B. Lingen, options for
34,920 shares held by William G. Luth and options for 15,500 shares held by John
M. Casler. As of December 29, 1997, options to purchase 196,314 shares under the
Plans (including options to purchase 154,364 shares held by directors and senior
management of the Company) were exercisable. Additionally, the Board of
Directors has approved the grant of options to purchase an aggregate of 220,000
shares of Common Stock to Messrs. Olen, Binkley, Lingen, Luth and Casler
contingent upon the completion of this offering. See "Management--1997 Stock
Option Grants." All of the options held by such officers and the directors of
the Company are subject to the lock-up agreements described above.
In connection with private placements of subordinated notes payable in 1993
and 1994, the Company issued to the note holders warrants to purchase 50,000
shares of Common Stock at an exercise price of $2.50 per share expiring in June
1998 and warrants to purchase 324,680 shares at $1.88 per share expiring in
April 1999. In May 1996, the Company issued subordinated notes payable to
replace and renew the 1993 and 1994 subordinated notes and certain other notes
payable and, in connection with the refinancing, issued warrants to purchase
341,347 shares of Common Stock at $1.81 per share expiring in May 2001. All of
the warrants are currently exercisable. The warrants will expire 30 days
following completion of this offering unless exercised prior to such time. The
Company expects that all or substantially all of the
43
<PAGE>
warrants will be exercised and intends to register the resale of the 695,603
shares issuable thereunder (after deducting 20,424 shares for sale in this
offering which will be issued pursuant to the exercise of warrants by a Selling
Shareholder) following the completion of this offering for the benefit of the
warrant holders. If so registered, such shares will be saleable by the holders
thereof in the public market, but all of such shares shall be subject to the
restrictions of the lock-up agreements described above.
The Company cannot predict the effect, if any, that sales of restricted
securities or the availability of such securities for sale could have on the
market price, if any, prevailing from time to time. Nevertheless, sales of
substantial amounts of the Company's Common Stock, including the Shares offered
hereby, or the perception that such sales might occur, could adversely affect
the market price of the Common Stock.
44
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Cruttenden Roth
Incorporated and John G. Kinnard and Company, Incorporated are acting as
representatives (the "Representatives"), have severally agreed, subject to the
terms and conditions of the Underwriting Agreement, to purchase from the Company
and the Selling Shareholders the 2,000,000 shares of Common Stock offered
hereby. The number of Shares that each Underwriter has agreed to purchase is set
forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Cruttenden Roth Incorporated.....................................................
John G. Kinnard and Company, Incorporated........................................
----------
Total.......................................................................... 2,000,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the several Underwriters will be
obligated to purchase all of the Shares offered hereby, if any are purchased.
The Underwriters propose to offer the Shares to the public at the Price to
Public set forth on the cover page of this Prospectus and to dealers at such
price less a concession not in excess of $ per share. The Underwriters
may allow, and such dealers may reallow, a concession not in excess of
$ per share to certain other brokers and dealers. After the public
offering, the Price to Public, concession and reallowance may be changed by the
Representatives.
The Selling Shareholders have granted the Underwriters an option exercisable
within 30 days after the date of this Prospectus to purchase up to an additional
300,000 shares of Common Stock at the Price to Public, less the Underwriting
Discount shown on the cover page of this Prospectus. The Underwriters may
exercise such option only for the purpose of covering any over-allotments in the
sale of the Shares of Common Stock offered hereby.
The Company has agreed to pay the Representatives a non-accountable expense
allowance equal to 2% of the total Price to Public shown on the cover page of
this Prospectus. The Company has paid the Representatives $50,000 as a deposit
against such non-accountable expense allowance.
The Company has agreed to sell to the Representatives, for nominal
consideration, a warrant to purchase up to 100,000 shares of Common Stock (the
"Representatives' Warrant"). The Representatives' Warrant may be exercised in
whole or in part commencing twelve months after the date of this Prospectus and
for a period of four years thereafter, at an exercise price equal to 120% of the
Price to Public. During the term of the Representatives' Warrant, it may not be
transferred, sold, assigned or hypothecated except to officers of the
Representatives. The Representatives' Warrant contains anti-dilution provisions
providing for appropriate adjustments on the occurrence of certain events, and
contains customary demand and participatory registration rights. Any profits
realized by the Representatives upon the sale of such warrant or the securities
issuable upon exercise thereof may be deemed to constitute additional
underwriting compensation.
45
<PAGE>
The Underwriting Agreement provides for reciprocal indemnification between
the Company, the Selling Shareholders, the Underwriters and their controlling
persons against civil liabilities in connection with this offering, including
liabilities under the Securities Act of 1933.
In connection with the offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock.
These transactions may include stabilizing bids, the imposition of penalty bids,
the purchase of securities to cover syndicate short positions and overallotments
in connection with the offering. The Underwriters may overallot the offering
creating a syndicate short position. A "stabilizing bid" is a bid for or the
purchase of the Common Stock on behalf of the Underwriters to reduce a short
position incurred by the Underwriters in connection with the offering. A
"penalty bid" is an arrangement permitting the Representatives to reclaim the
selling concession otherwise accruing to an Underwriter or syndicate member in
connection with the offering if the Common Stock originally sold by such
Underwriter or syndicate member is purchased by the Representatives in a
syndicate covering transaction and has therefore not been effectively placed by
such Underwriter or syndicate member. These activities may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. The Underwriters are not
required to engage in these activities, and may end any of these activities at
any time.
Each of the directors, officers and certain other shareholders of the
Company have agreed, for a period of 180 days from the effective date of this
offering (the "Lock-up Period"), not to offer, sell or otherwise dispose of an
aggregate of 1,528,139 shares of Common Stock held by them without the prior
written consent of Cruttenden Roth Incorporated. In addition, each of such
shareholders has agreed that any shares sold by such shareholder in the 90 day
period following the Lock-up Period will be sold through the Representatives.
The Company has agreed, for a period of 180 days from the effective date of this
offering, that it will not offer, sell or otherwise dispose of any shares of
Common Stock, options or warrants to acquire Common Stock or securities
convertible into Common Stock (other than pursuant to existing employee stock
option plans and outstanding options, warrants and convertible securities)
without the prior written consent of Cruttenden Roth Incorporated.
Although the Common Stock is traded in the local over-the-counter market,
such trading has been limited and sporadic. See "Price Range of Common Stock."
The public offering price will be determined by negotiation among the Company,
the Selling Shareholders and the Representatives. The factors to be considered
in determining the public offering price include, in addition to the prices
prevailing in the local over-the-counter market for the Common Stock, the
history of, and the prospects for, the Company and the industry in which it
competes, an assessment of the Company's management, the Company's past and
present operations, its past and present earnings and the trend of such
earnings, the general conditions of the securities markets at the time of the
offering and the market prices of publicly traded common stocks of comparable
companies in recent periods.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company and the Selling Shareholders by Chernesky, Heyman & Kress P.L.L.,
Dayton, Ohio. Ralph E. Heyman, a partner of Chernesky, Heyman & Kress P.L.L.,
owns 2,000 shares of Common Stock for his own account and holds an aggregate of
397,836 shares of Common Stock and warrants to purchase 97,652 shares of Common
Stock as trustee of various trusts for the benefit of Vincent W. Shiel and Helen
M. Shiel and their children and grandchildren. Certain legal matters in
connection with the sale of the Common Stock offered hereby will be passed upon
for the Underwriters by Dorsey & Whitney LLP, Minneapolis, Minnesota.
EXPERTS
The financial statements of the Company included or incorporated by
reference in this Prospectus and elsewhere in the Registration Statement to the
extent and for the periods indicated in their report have
46
<PAGE>
been audited by Grant Thornton LLP, independent certified public accountants,
and are included or incorporated by reference herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
report.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 and in accordance therewith files reports and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy and information statements and other information filed by the
Company with the Commission can be inspected and copied at the office of the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, or at
certain of its Regional Offices located at 7 World Trade Center, Suite 1300, New
York, New York 10048; and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661, and copies of such material can be obtained from the Public Reference
Section of the Commission, at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Commission maintains a web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The address of the web site is
http:// www.sec.gov.
This Prospectus constitutes a part of a Registration Statement filed by the
Company with the Commission under the Securities Act of 1933. This Prospectus
omits certain of the information contained in the Registration Statement, and
reference is hereby made to the Registration Statement and the related exhibits
for further information with respect to the Company and the securities offered
hereby. Any statements contained herein concerning the provisions of any
document are not necessarily complete, and in such instance reference is made to
the copy of such document filed as an exhibit to the Registration Statement or
otherwise filed with the Commission. Each such statement is qualified in its
entirety by such reference.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended December
27, 1996 and Quarterly Reports on Form 10-Q for the fiscal periods ended March
28, 1997, June 27, 1997 and September 26, 1997 are hereby incorporated by
reference in this Prospectus. All other reports filed by the Company with the
Commission pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 since December 27, 1996 and prior to the termination of this offering shall
be deemed to be incorporated by reference in this Prospectus and to be a part
hereof from the date of filing of such reports.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, on the written or oral
request of such person, a copy of any or all of the documents incorporated
herein by reference (other than exhibits to such documents which are not
specifically incorporated by reference in such documents). Written or telephone
requests for such copies should be directed to Charles B. Lingen, Secretary, The
Sportsman's Guide, Inc., 411 Farwell Avenue, South St. Paul, Minnesota 55075,
(612) 451-3030.
47
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Report of Independent Certified Public Accountants......................................................... F-2
Balance Sheets as of December 29, 1995 and December 27, 1996, and September 26, 1997
(unaudited).............................................................................................. F-3
Statements of Operations for the fiscal years ended December 30, 1994, December 29, 1995 and December 27,
1996, and the thirty-nine weeks ended September 27, 1996 (unaudited) and September 26, 1997
(unaudited).............................................................................................. F-4
Statements of Changes in Shareholders' Equity for the fiscal years ended December 30, 1994, December 29,
1995 and December 27, 1996, and the thirty-nine weeks ended September 26, 1997 (unaudited)............... F-5
Statements of Cash Flows for the fiscal years ended December 30, 1994, December 29, 1995 and December 27,
1996, and the thirty-nine weeks ended September 27, 1996 and September 26, 1997 (unaudited).............. F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
<TABLE>
<S> <C> <C>
[LOGO]
GRANT THORNTON LLP Accountants and
Management
Consultants
The U.S. Member Firm
of
Grant Thornton
International
</TABLE>
Board of Directors and Shareholders
The Sportsman's Guide, Inc.
We have audited the accompanying balance sheets of The Sportsman's Guide,
Inc. (a Minnesota corporation) as of December 27, 1996 and December 29, 1995 and
the related statements of operations, changes in shareholders' equity, and cash
flows for each of the three fiscal years in the period ended December 27, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Sportsman's Guide, Inc.
as of December 27, 1996 and December 29, 1995, and the results of its operations
and its cash flows for each of the three fiscal years in the period ended
December 27, 1996 in conformity with generally accepted accounting principles.
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
January 29, 1997 (except for the last paragraph of Note H,
as to which the date is March 5, 1997)
F-2
<PAGE>
THE SPORTSMAN'S GUIDE, INC.
BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 27, SEPTEMBER 26,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS
Accounts receivable--net........................................... $ 2,231 $ 3,038 $ 2,353
Inventory.......................................................... 14,208 17,765 29,552
Prepaid expenses................................................... 858 538 1,470
Promotional material............................................... 2,114 2,194 2,945
------------ ------------ -------------
Total current assets........................................... 19,411 23,535 36,320
PROPERTY AND EQUIPMENT--NET.......................................... 4,298 4,355 4,345
------------ ------------ -------------
Total assets................................................... $ 23,709 $ 27,890 $ 40,665
------------ ------------ -------------
------------ ------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft..................................................... $ 1,619 $ 3,539 $ 1,156
Notes payable--bank................................................ 965 1,497 13,256
Current maturities of long-term debt
Related parties.................................................. 2,095 -- 1,795
Other............................................................ 1,368 52 1,662
Accounts payable................................................... 13,554 10,710 14,842
Accrued expenses................................................... 794 1,809 1,205
Customer deposits and other liabilities............................ 1,479 2,316 2,013
------------ ------------ -------------
Total current liabilities...................................... 21,874 19,923 35,929
LONG-TERM LIABILITIES
Long-term debt
Related parties.................................................. -- 1,795 --
Other............................................................ 287 1,811 118
Deferred income taxes.............................................. -- 486 389
------------ ------------ -------------
Total liabilities.............................................. 22,161 24,015 36,436
COMMITMENTS AND CONTINGENCIES........................................ -- -- --
SHAREHOLDERS' EQUITY
Series A Preferred Stock--$.01 par value; 200,000 shares
authorized; 20,000 shares issued and outstanding................. -- -- --
Common Stock--$.01 par value; 36,800,000 shares authorized;
2,333,600 shares issued and outstanding at December 29, 1995 and
December 27, 1996 and 2,339,225 shares issued and outstanding at
September 26, 1997............................................... 23 23 23
Additional paid-in capital......................................... 2,350 2,350 2,365
Accumulated earnings (deficit)..................................... (825) 1,502 1,841
------------ ------------ -------------
Total shareholders' equity..................................... 1,548 3,875 4,229
------------ ------------ -------------
Total liabilities and shareholders' equity..................... $ 23,709 $ 27,890 $ 40,665
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
THE SPORTSMAN'S GUIDE, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED THIRTY-NINE WEEKS ENDED
---------------------------------------- ----------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 27, SEPTEMBER 27, SEPTEMBER 26,
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales.................................. $ 96,398 $ 101,832 $ 112,270 $ 69,273 $ 77,611
Cost of sales.......................... 64,367 67,137 72,200 45,624 47,234
------------ ------------ ------------ ------------- -------------
Gross profit....................... 32,031 34,695 40,070 23,649 30,377
Selling, general and administrative
expenses............................. 28,299 35,924 36,014 23,017 28,892
------------ ------------ ------------ ------------- -------------
Earnings (loss) from operations.... 3,732 (1,229) 4,056 632 1,485
Interest expense....................... (582) (943) (981) (714) (963)
Miscellaneous income (expense), net.... (43) 73 11 10 (4)
------------ ------------ ------------ ------------- -------------
Earnings (loss) before income
taxes............................ 3,107 (2,099) 3,086 (72) 518
Income taxes........................... (385) 355 (759) -- (179)
------------ ------------ ------------ ------------- -------------
Net earnings (loss)................ $ 2,722 $ (1,744) $ 2,327 $ (72) $ 339
------------ ------------ ------------ ------------- -------------
------------ ------------ ------------ ------------- -------------
Net earnings (loss) per common and
common equivalent share:
Primary............................ $ 1.05 $ (.75) $ .92 $ (.03) $ .12
------------ ------------ ------------ ------------- -------------
------------ ------------ ------------ ------------- -------------
Fully diluted...................... $ 1.01 $ (.75) $ .91 $ (.03) $ .11
------------ ------------ ------------ ------------- -------------
------------ ------------ ------------ ------------- -------------
Weighted average common and common
equivalent shares outstanding:
Primary............................ 2,588 2,334 2,589 2,334 2,888
------------ ------------ ------------ ------------- -------------
------------ ------------ ------------ ------------- -------------
Fully diluted...................... 2,700 2,334 2,589 2,334 3,006
------------ ------------ ------------ ------------- -------------
------------ ------------ ------------ ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
THE SPORTSMAN'S GUIDE, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------ ------------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1994................................. 20 $ -- 2,334 $ 23 $ 2,350
Net earnings for fiscal year ended December 30, 1994...... -- -- -- -- --
--
--- ----- --- -----------
Balances at December 30, 1994............................... 20 -- 2,334 23 2,350
Net loss for fiscal year ended December 29, 1995.......... -- -- -- -- --
--
--- ----- --- -----------
Balances at December 29, 1995............................... 20 -- 2,334 23 2,350
Net earnings for fiscal year ended December 27, 1996...... -- -- -- -- --
--
--- ----- --- -----------
Balances at December 27, 1996............................... 20 -- 2,334 23 2,350
Exercise of stock options (unaudited)..................... -- -- 5 -- 15
Net earnings for thirty-nine weeks ended September 26,
1997 (unaudited)........................................ -- -- -- -- --
--
--- ----- --- -----------
Balances at September 26, 1997 (unaudited).................. 20 $ -- 2,339 $ 23 $ 2,365
--
--
--- ----- --- -----------
--- ----- --- -----------
<CAPTION>
ACCUMULATED
EARNINGS
(DEFICIT)
------------
<S> <C>
Balances at January 1, 1994................................. $ (1,803)
Net earnings for fiscal year ended December 30, 1994...... 2,722
------------
Balances at December 30, 1994............................... 919
Net loss for fiscal year ended December 29, 1995.......... (1,744)
------------
Balances at December 29, 1995............................... (825)
Net earnings for fiscal year ended December 27, 1996...... 2,327
------------
Balances at December 27, 1996............................... 1,502
Exercise of stock options (unaudited)..................... --
Net earnings for thirty-nine weeks ended September 26,
1997 (unaudited)........................................ 339
------------
Balances at September 26, 1997 (unaudited).................. $ 1,841
------------
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
THE SPORTSMAN'S GUIDE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED THIRTY-NINE WEEKS ENDED
------------------------------------------- ------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 27, SEPTEMBER 27, SEPTEMBER 26,
1994 1995 1996 1996 1997
------------- ------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net earnings (loss).................. $ 2,722 $ (1,744) $ 2,327 $ (72) $ 339
Adjustments to reconcile net
earnings (loss) to net cash
provided by (used in) operating
activities:
Depreciation and
amortization................. 455 708 1,092 751 1,026
Deferred income taxes.......... 290 (290) 486 -- (97)
Other.......................... 94 (38) (44) (40) (42)
Changes in assets and
liabilities:
Accounts receivable.......... (521) (1,446) (807) (11) 685
Inventory.................... (3,419) (637) (3,557) (4,659) (11,787)
Prepaid expenses............. (594) (131) 320 119 (932)
Promotional material......... (688) 41 (80) (87) (751)
Bank overdraft............... -- 1,619 1,920 175 (2,383)
Accounts payable............. 1,979 2,664 (2,844) (3,162) 4,132
Accrued expenses............. 636 (249) 1,015 205 (604)
Customer deposits and other
liabilities................ (1,079) 779 834 1 (303)
------------- ------------- ------------- ------- -------------
Cash flows provided by (used
in) operating activities... (125) 1,276 662 (6,780) (10,717)
Cash flows from investing activities:
Purchases of property and
equipment.......................... (2,063) (1,911) (1,149) (895) (1,016)
Proceeds from sale of property and
equipment.......................... 28 136 -- -- --
------------- ------------- ------------- ------- -------------
Cash flows used in investing
activities................. (2,035) (1,775) (1,149) (895) (1,016)
Cash flows from financing activities:
Net proceeds from revolving credit
line............................... -- 965 532 7,716 11,759
Payments on trade creditors'
obligation......................... (150) (561) -- -- --
Proceeds from long-term debt......... 2,500 -- -- -- --
Payments on long-term debt........... (258) (558) (45) (41) (41)
Proceeds from exercise of stock
options............................ -- -- -- -- 15
------------- ------------- ------------- ------- -------------
Cash flows provided by (used
in) financing activities... 2,092 (154) 487 7,675 11,733
------------- ------------- ------------- ------- -------------
Decrease in cash and cash
equivalents.......................... (68) (653) -- -- --
Cash and cash equivalents at beginning
of period............................ 721 653 -- -- --
------------- ------------- ------------- ------- -------------
Cash and cash equivalents at end of
period............................... $ 653 $ -- $ -- $ -- $ --
------------- ------------- ------------- ------- -------------
------------- ------------- ------------- ------- -------------
Supplemental disclosure of cash flow
information
Cash paid during the periods for:
Interest......................... $ 613 $ 938 $ 1,019 $ 779 $ 895
Income taxes..................... 28 191 5 3 956
Supplemental disclosure of noncash
investing and financing activities
Fixed assets acquired under capital
lease............................ $ 11 $ 17 $ -- $ -- $ --
Disposal of fixed assets acquired
under capital lease.............. 27 -- -- -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. DESCRIPTION OF BUSINESS
The Sportsman's Guide, Inc. (the "Company") is a mail order catalog
retailer, offering a variety of products including footwear, clothing and
accessories, hunting and shooting accessories, camping and outdoor recreation
equipment, optics and ammunition as well as a diverse range of additional
offerings in other product catagories. The Company conducts its operations out
of one warehouse and office facility in South St. Paul, Minnesota and two retail
locations in South St. Paul and Moundsview, Minnesota and distributes its
catalogs throughout the United States.
2. INTERIM FINANCIAL INFORMATION (UNAUDITED)
Financial statements and related footnote data as of and for the thirty-nine
weeks ended September 27, 1996 and September 26, 1997 are unaudited, but in the
opinion of the Company include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation thereof. The results of
operations for the thirty-nine weeks ended September 26, 1997 are not
necessarily indicative of the results to be expected for the entire fiscal year.
3. REVENUE RECOGNITION
Sales are recorded at the time of shipment along with a provision for
anticipated merchandise returns, net of exchanges, which is recorded based upon
historical experience. The provision charged against sales was $4.9 million,
$5.2 million, $7.4 million, $4.3 million and $6.6 million during fiscal years
1994, 1995 and 1996 and thirty-nine weeks ended September 27, 1996 and September
26, 1997. Reserves for returns, net of exchanges, of $218,000, $177,000,
$640,000 and $478,000 were recorded in accrued expenses at December 30, 1994,
December 29, 1995, December 27, 1996 and September 26, 1997.
Amounts billed to customers for shipping of orders are netted against the
associated costs.
Customers can purchase one year memberships in the Company's buyer's club
for a $29.99 annual fee. The Company also offers two and three year memberships
at $53.99 and $80.99. Club members receive merchandise discounts of 10% on
regularly priced items and 5% on sale items and special buys. Membership fees
are deferred and recognized in income as the members place orders and receive
discounts. After 50% of the membership term has expired, members can no longer
cancel their memberships, and any remaining deferred membership fees are
recognized as income.
4. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid temporary investments purchased with
an original maturity of three months or less to be cash equivalents. The Company
also considers credit card settlements in-transit as cash for reporting
purposes. Chargebacks from the credit card companies are charged against
operations at the time initiated by the credit card company.
5. BANK OVERDRAFT
As a result of maintaining a consolidated cash management system, the
Company maintains overdraft positions at its primary bank. When outstanding
checks exceed the bank cash balances, the bank overdraft is included in current
liabilities.
F-7
<PAGE>
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
6. ACCOUNTS RECEIVABLE
Accounts receivable consist primarily of amounts owed for merchandise by
customers utilizing the four payment installment plan and amounts owed for list
rental and other advertising services provided by the Company to third parties.
The Company had an allowance for doubtful accounts of $140,000 and $156,000 at
December 27, 1996 and September 26, 1997. No allowance was provided for at
December 29, 1995.
7. INVENTORY
Inventory consists of purchased finished merchandise available for sale and
is recorded at the lower of cost or market with the first-in, first-out ("FIFO")
method used to determine cost.
8. PROMOTIONAL MATERIAL
The cost of producing and mailing catalogs is deferred and expensed over the
estimated useful lives of the catalogs. Catalog production and mailing costs are
amortized over periods ranging from four to six months from the in-home date of
the catalog. The ongoing cost of developing and maintaining the customer list is
charged to operations as incurred.
9. PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation and
amortization. The Company capitalizes external and incremental internal costs of
developing computer software for internal use that represent major enhancements
and/or replacements of operating and management systems. Depreciation and
amortization is computed using the straight-line method.
10. INCOME TAXES
Deferred tax assets and liabilities represent the tax effects, based on
current tax law, of future deductible or taxable items that have been recognized
in the financial statements.
11. STOCK OPTIONS
The Company's employee stock option plans are accounted for under the
intrinsic value method.
12. NET EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Net earnings (loss) per common and common equivalent share are computed by
dividing net earnings (loss) by the weighted average number of common and common
equivalent shares outstanding, when dilutive. Net earnings (loss) per common and
common equivalent share were calculated using the modified treasury stock method
in fiscal 1996 and thirty-nine weeks ended September 26, 1997, and the treasury
stock method in fiscal 1994, fiscal 1995 and thirty-nine weeks ended September
27, 1996.
13. FISCAL YEAR
The Company's fiscal year ends on the Friday nearest December 31 for years
prior to 1997 and the Sunday nearest December 31 for 1997. Fiscal years 1994,
1995 and 1996 consisted of 52 weeks.
F-8
<PAGE>
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
14. USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
15. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) 128, EARNINGS PER SHARE, which is
effective for financial statements issued after December 15, 1997. Early
adoption of the new standard is not permitted. The new standard eliminates
primary and fully diluted earnings per share and requires presentation of basic
and diluted earnings per share together with disclosure of how the per share
amounts were computed.
The FASB also issued SFAS 130, REPORTING COMPREHENSIVE INCOME, which
requires the Company to display an amount representing total comprehensive
income, as defined by the statement, as part of the Company's basic financial
statements. Additionally, SFAS 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
AND RELATED INFORMATION, requires the Company to disclose financial and other
information about its business segments, their products and services, geographic
areas, sales, profits, assets and other information. These statements are
effective for financial statements for periods beginning after December 15,
1997.
The adoption of these statements is not expected to have a material effect
on the consolidated financial statements of the Company.
16. RECLASSIFICATIONS
Certain reclassifications have been made to the 1994 and 1995 financial
statements to conform to the 1996 presentation.
NOTE B--RELATED PARTY TRANSACTIONS
The Company purchased $448,000, $175,000, $41,000, $1,000 and $6,000 of
inventory during fiscal years 1994, 1995 and 1996 and thirty-nine weeks ended
September 27, 1996 and September 26, 1997 from companies owned by family members
of certain officers and directors of the Company.
The Company purchased $6.7 million, $4.4 million, $3.0 million, $2.3 million
and $1.3 million of inventory during fiscal years 1994, 1995 and 1996 and
thirty-nine weeks ended September 27, 1996 and September 26, 1997 from companies
partially owned by two directors of the Company.
The Company incurred interest expense on related party subordinated notes
payable of $171,000, $172,000, $172,000, $131,000 and $137,000 during fiscal
years 1994, 1995 and 1996 and thirty-nine weeks ended September 27, 1996 and
September 26, 1997.
F-9
<PAGE>
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE C--PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
DECEMBER 29, DECEMBER 27, SEPTEMBER 26, USEFUL
1995 1996 1997 LIVES
------------ ------------ ------------- -----------
<S> <C> <C> <C> <C>
Machinery, equipment and furniture.... $ 2,152 $ 2,343 $ 2,618 5-12 years
Equipment under capital leases........ 133 133 133 5 years
Leasehold improvements................ 802 853 1,036 Lease life
Computer equipment and accessories.... 853 935 1,113 5 years
Computer software..................... 1,728 2,553 2,934 5 years
------------ ------------ -------------
5,668 6,817 7,834
Less accumulated depreciation and
amortization........................ (1,370) (2,462) (3,489)
------------ ------------ -------------
$ 4,298 $ 4,355 $ 4,345
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
NOTE D--COMMITMENTS AND CONTINGENCIES
The Company has entered into several long-term contracts related to a
building facility, telecommunications and computer equipment and long-distance
telephone services. The Company occupies approximately 320,000 square feet under
a lease that expires in March 1999. In addition to the base rent, the lease
requires the Company to pay real estate taxes, utilities, insurance and
maintenance; therefore, these costs are included in future minimum lease
payments. The Company has several operating leases relating to telecommunication
and computer equipment with varying terms ranging from 19 to 48 months. During
1996, the Company entered into a three year agreement for long-distance
telephone services with minimum purchase commitments of approximately $900,000
per year.
At September 26, 1997, future minimum commitments under the above agreements
are as follows for the fiscal periods (in thousands):
<TABLE>
<S> <C>
1997................................................................ $ 798
1998................................................................ 2,772
1999................................................................ 1,411
2000................................................................ 170
2001................................................................ 139
2002................................................................ 126
---------
$ 5,416
---------
---------
</TABLE>
Rent expense was $900,000, $1.7 million, $1.8 million, $1.3 million and $1.5
million for fiscal years 1994, 1995 and 1996 and thirty-nine weeks ended
September 27, 1996 and September 26, 1997.
The Company is not a party to any pending legal proceedings other than
litigation which is incidental to its business and which the Company believes is
not material.
Several states, where the Company does not currently collect and remit sales
and use taxes, have attempted to enact legislation that seeks to require
out-of-state mail order companies to collect and remit
F-10
<PAGE>
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE D--COMMITMENTS AND CONTINGENCIES (CONTINUED)
such taxes. No assessments have been made against the Company and, to its
knowledge, none has been threatened or is contemplated. The United States
Supreme Court has held that such taxes place an unconstitutional burden on
interstate commerce, which may only be resolved by actions of the United States
Congress.
NOTE E--REVOLVING CREDIT FACILITY
During 1996, the Company entered into a credit facility providing a
revolving line of credit up to $10.0 million, subject to an adequate borrowing
base, expiring in May 1998. Funding under the credit facility is subject to a
collateral base consisting of inventory, plus 80% of accounts receivable under
the installment plan, less customer liabilities. The collateral base related to
inventory is limited to $6.0 million December 16 through March 31, $7.0 million
in April and $10.0 million May 1 through December 15 of each year. The revolving
line of credit is for working capital and letters of credit. Commercial letters
of credit may not exceed $1.0 million at any time. Borrowings under the
revolving line of credit bear interest at the bank's prime rate plus an
applicable percentage point spread. The spread cannot exceed 1.50% at any time,
but may be lower if the Company meets certain debt to tangible net worth ratio
levels. As of December 27, 1996, the spread was 1.50%. As of September 26, 1997
interest was at the bank's prime rate. The availability of funding under the
facility is subject to the sum of the principal balance and letters of credit
being paid down to $3.0 million, plus 80% of installment receivables. The
paydown requirement must be maintained for not less than 15 consecutive days
between December 1 and March 31 of each year. The revolving line of credit is
collateralized by substantially all of the assets of the Company. (See Note J).
All borrowings are subject to various monthly covenants. The most
restrictive covenants require certain levels of year-to-date net earnings (loss)
and net worth and have a maximum debt to net worth ratio and a maximum yearly
level of capital spending. As of September 26, 1997 and December 27, 1996, the
Company was in compliance with all applicable covenants under the revolving line
of credit agreement.
The following is a summary of the credit facility (in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED THIRTY-NINE WEEKS ENDED
------------------------------------- --------------------------
DECEMBER DECEMBER DECEMBER SEPTEMBER
30, 29, 27, SEPTEMBER 27, 26,
1994 1995 1996 1996 1997
----------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at end of
period.............. $ -- $ 965 $ 1,497 $ 8,681 $ 13,256
Interest rate at end
of period........... 10.00% 9.50% 9.75% 9.75% 8.50%
Maximum month-end
borrowing during the
period.............. $ 6,985 $ 11,720 $ 9,765 $ 9,471 $ 13,256
Average daily
borrowing during the
period.............. $ 2,445 $ 6,729 $ 6,029 $ 5,867 $ 9,692
Weighted average
interest rate during
the period.......... 9.27% 9.23% 10.60% 10.63% 9.18%
</TABLE>
F-11
<PAGE>
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE F--LONG-TERM DEBT
Long-term debt is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 27, SEPTEMBER 26,
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Subordinated notes payable to shareholders, interest at
1.75% over prime but not less than 9%, payable quarterly
(effective rate of 10% at December 27, 1996 and 10.25% at
September 26, 1997), principal due June 1998.
Collateralized by the assets of the Company (a).......... $ 3,414 $ 3,414 $ 3,414
Note payable to a government agency, interest at 4%,
principal and interest payable annually through June
1998. Collateralized by machinery, equipment and
furniture and fixtures (b)............................... 220 182 145
Capitalized leases and other............................... 116 62 16
------ ------ ------
3,750 3,658 3,575
Less current maturities.................................... 3,463 52 3,457
------ ------ ------
$ 287 $ 3,606 $ 118
------ ------ ------
------ ------ ------
</TABLE>
- ------------------------
(a) These notes were renewed during 1996. In connection with the renewal,
the Company issued warrants to purchase 341,347 shares of common stock
(see note H). The above notes payable to shareholders are subordinate to
present and future financial institution borrowings (see note E).
(b) Financing obtained from a government agency in connection with the
Company's new facility lease. Annual principal payments of $30,000 plus
interest are required, with the final payment of $160,000 due in June
1998. Principal of $13,000 will be forgiven each year if the Company
attains certain payroll levels. In 1997, 1996 and 1995, the required
payroll level was achieved. If the Company renews its lease in 1998, the
final payment of $160,000 will be restructured to be payable over five
additional years.
Aggregate maturities of long-term debt at September 26, 1997 are as
follows for the fiscal periods (in thousands):
<TABLE>
<S> <C>
1997................................................................ $ 11
1998................................................................ 3,564
---------
$ 3,575
---------
---------
</TABLE>
The fair value of long-term debt approximates the carrying value.
F-12
<PAGE>
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE G--INCOME TAXES
The provision for income tax expense (benefit) consists of the following for
fiscal years 1994, 1995 and 1996 and thirty-nine weeks ended September 27, 1996
and September 26, 1997 (in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED THIRTY-NINE WEEKS ENDED
----------------------------------------------- --------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 27, SEPTEMBER 27, SEPTEMBER 26,
1994 1995 1996 1996 1997
--------------- ------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Current
Federal......................... $ 89 $ (70) $ 263 $ -- $ 268
State........................... 6 5 10 -- 8
----- ----- ----- ----- -----
95 (65) 273 -- 276
Deferred
Federal......................... 290 (290) 486 -- (97)
----- ----- ----- ----- -----
$ 385 $ (355) $ 759 $ -- $ 179
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
Differences between income tax expense (benefit) and amounts derived by
applying the statutory federal income tax rate to earnings (loss) before income
taxes are as follows for fiscal years 1994, 1995 and 1996 and thirty-nine weeks
ended September 27, 1996 and September, 26, 1997:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED THIRTY-NINE WEEKS ENDED
------------------------------------------------ ----------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 27, SEPTEMBER 27, SEPTEMBER 26,
1994 1995 1996 1996 1997
--------------- -------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
U.S. federal statutory rate....... 34.0% (34.0)% 34.0% 34.0% 34.0%
Change in valuation allowance..... (21.7) 20.2 (13.7) (34.0) --
Adjustment of prior years'
accruals........................ -- -- 3.8 -- --
Other............................. 0.1 (3.1) 0.5 -- 0.6
----- ----- ----- ----- ---
12.4% (16.9)% 24.6% --% 34.6%
----- ----- ----- ----- ---
----- ----- ----- ----- ---
</TABLE>
F-13
<PAGE>
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE G--INCOME TAXES (CONTINUED)
The components of the net deferred tax asset and liability at December 29,
1995, December 27, 1996 and September 26, 1997, calculated at 34% consist of (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 27, SEPTEMBER 26,
1995 1996 1997
------------- ------------- ---------------
<S> <C> <C> <C>
Current deferred tax assets (liabilities):
Inventory capitalization....................... $ 185 $ 219 $ 379
Inventory reserve.............................. 51 218 332
Vacation accrual............................... 100 99 95
Returns reserve................................ 60 218 163
Net operating loss carryforwards............... 1,277 -- --
Promotional material........................... (671) (618) (690)
Prepaid expenses............................... (240) (148) (160)
Income tax credits............................. 66 137 --
Other.......................................... 21 94 101
------ ----- -----
849 219 220
Valuation allowance............................ (424) -- --
------ ----- -----
Deferred tax asset........................... 425 219 220
Long-term deferred tax assets (liabilities):
Depreciation................................... (306) (238) (186)
Internally developed software.................. (107) (467) (423)
Other.......................................... (12) -- --
------ ----- -----
Deferred tax liability....................... (425) (705) (609)
------ ----- -----
Net deferred tax liability................... $ -- $ (486) $ (389)
------ ----- -----
------ ----- -----
</TABLE>
NOTE H--SHAREHOLDERS' EQUITY
The Company has 40,000,000 authorized shares; 200,000 of Series A Preferred
Stock (see Note J), 36,800,000 of Common Stock and 3,000,000 undesignated
shares.
STOCK OPTIONS
The Company has a stock option plan (the "1991 Plan") which provides
participating employees the right to purchase common stock of the Company
through incentive stock options. A total of 35,000 shares of common stock are
reserved for issuance under the 1991 Plan. Options issued under the 1991 Plan
are exercisable over a ten year period from the date of grant. A total of 30,750
options were granted under the 1991 Plan during 1991 through 1993 at a range of
exercise prices from $2.00 to $2.50 per share. A total of 19,750 options at a
range of exercise prices from $2.00 to $2.50 per share were canceled. A total of
250 options at an exercise price of $2.50 were exercised. During 1996, a total
of 6,750 options at an exercise price of $2.00 expired. At December 27, 1996, a
total of 4,000 options were outstanding, of which 3,000 options were
exercisable. At September 26, 1997, a total of 4,000 options were outstanding,
all of which were exercisable.
F-14
<PAGE>
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE H--SHAREHOLDERS' EQUITY (CONTINUED)
During 1993, the Company issued options to purchase 55,000 shares of the
Company's common stock at $2.50 per share to an officer of the Company. The
options, which are nontransferable, may only be exercised within six months of
the occurrence of any of the following events or they terminate: the death or
permanent disability of the officer, retirement at age 62, termination of
employment without cause or a public offering of the Company's common stock.
None of the options were exercisable at December 27, 1996 and September 26,
1997.
During 1993, the Company also issued options to purchase 5,000 shares of the
Company's common stock at $2.50 per share to a director and former officer of
the Company. All of the options were exercisable at December 27, 1996 and all
were exercised in 1997.
The Company has a non-qualified stock option plan (the "1994 Plan") which
provided for the issuance of up to 100,000 options to purchase shares of the
Company's common stock to certain employees, contingent upon meeting certain
quarterly pre-tax earnings levels. Options issued under the 1994 Plan are
exercisable over a three year period from the date of grant. During 1997, a
total of 36,564 options issued and outstanding under the 1994 Plan were amended
to extend the term of exercise from three years from the date of grant to ten
years from the date of grant. A total of 50,003 options were granted under the
1994 Plan during 1994 and 1995 at a range of exercise prices from $3.70 to $8.70
per share. During 1995, a total of 1,000 options at a range of exercise prices
from $3.70 to $8.70 were canceled. During 1996, a total of 4,125 options at a
range of exercise prices from $3.70 to $8.70 were canceled. During 1997, a total
of 1,501 options at a range of exercise prices from $3.70 to $8.70 were canceled
and a total of 2,500 options at a range of exercise prices of $3.70 to $5.30
expired. At December 27, 1996, a total of 44,878 options were outstanding, all
of which were exercisable, and at September 26, 1997, a total of 40,877 options
were outstanding, all of which were exercisable.
The Company has an incentive stock option plan (the "1996 Plan") which
provides selected key employees the right to purchase common stock of the
Company through the exercise of options granted. A total of 400,000 shares of
common stock are reserved for issuance under the 1996 Plan (see Note J). Options
issued under the 1996 Plan are exercisable over a ten year period from the date
of grant. A total of 125,000 options were granted under the 1996 Plan during
1996 at an exercise price of $2.50. During 1997, a total of 130,000 options were
granted under the 1996 Plan at an exercise price of $4.00. During 1997, a total
of 625 options at a range of exercise prices of $2.50 to $4.00 were exercised
and a total of 4,375 options at a range of exercise prices of $2.50 to $4.00
were cancelled. At December 27, 1996, a total of 125,000 options were
outstanding, all of which were exercisable, and at September 26, 1997, a total
of 250,000 options were outstanding, of which 152,875 options were exercisable.
F-15
<PAGE>
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE H--SHAREHOLDERS' EQUITY (CONTINUED)
The following applies to options that are outstanding at September 26, 1997:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
- --------------- ----------- ---------------- ----------------
<C> <C> <S> <C>
$2.50--$3.70 185,950 8 years $2.54
$4.00--$5.50 145,277 9 years $4.15
$8.70 18,650 7 years $8.70
-----------
349,877
-----------
-----------
<CAPTION>
RANGE OF NUMBER WEIGHTED AVERAGE
EXERCISE PRICES EXERCISABLE EXERCISE PRICE
- --------------- ----------- ----------------
<S> <C> <S> <C>
$2.50--$3.70 130,950 $2.56
$4.00--$5.50 48,152 $4.46
$8.70 18,650 $8.70
-----------
197,752
-----------
-----------
</TABLE>
Exercise prices for all of the options granted were equal to or higher than
the fair value of the Company's common stock on the respective grant dates and,
therefore, no compensation expense has been recorded by the Company. A summary
of the stock option transactions during fiscal years 1994, 1995 and 1996 is as
follows:
<TABLE>
<CAPTION>
1994 1995 1996
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year...... 82,250 $ 2.43 104,503 $ 3.12 121,753 $ 4.03
Granted............................. 30,003 4.83 20,000 8.70 125,000 2.50
Exercised........................... (250) 2.50 -- -- -- --
Forfeited........................... (7,500) 2.40 (2,750) 3.25 (6,125) 4.26
Expired............................. -- -- -- -- (6,750) 2.00
--------- --------- ---------
Outstanding at end of year............ 104,503 $ 3.12 121,753 $ 4.03 233,878 $ 3.27
--------- --------- ---------
--------- --------- ---------
Options exercisable at end of year.... 38,878 $ 4.20 64,753 $ 5.38 177,878 $ 3.51
--------- --------- ---------
--------- --------- ---------
Weighted average fair value of options
granted during the year............. N/A $ 2.20 $ 1.30
</TABLE>
F-16
<PAGE>
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE H--SHAREHOLDERS' EQUITY (CONTINUED)
A summary of the stock option transactions during the thirty-nine weeks
ended September 27, 1996 and September 26, 1997 is as follows:
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
----------------------------------------------
SEPTEMBER 27, 1996 SEPTEMBER 26, 1997
---------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Outstanding at beginning of period.......................... 121,753 $ 4.03 233,878 $ 3.27
Granted................................................... -- -- 130,000 4.00
Exercised................................................. -- -- (5,625) 2.53
Forfeited................................................. (6,125) 4.26 (5,876) 3.43
Expired................................................... (6,750) 2.00 (2,500) 4.50
--------- ---------
Outstanding at end of period................................ 108,878 $ 4.15 349,877 $ 3.54
--------- ---------
--------- ---------
Options exercisable at end of period........................ 52,878 $ 5.89 197,752 $ 3.60
--------- ---------
--------- ---------
</TABLE>
The FASB issued SFAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which
introduced an alternative method for recognizing compensation costs based upon
the fair market value of the awards on the date they are granted. SFAS 123
allows entities to continue to account for stock options using the intrinsic
value method, provided pro forma net earnings and net earnings per share as if
the fair value based method had been used are disclosed.
The Company's pro forma net earnings (loss) and net earnings (loss) per
common and common equivalent share for fiscal years 1995 and 1996, had the fair
value based method been used, are set forth below. These effects may not be
representative of the future effects of applying this statement.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C> <C>
Net earnings (loss)....................................... As reported $ (1,744) $ 2,327
Pro forma (1,788) 2,164
Net earnings (loss) per common and common equivalent share
Primary............................................... As reported $ (.75) $ .92
Pro forma (.77) .86
Fully diluted......................................... As reported $ (.75) $ .91
Pro forma (.77) .84
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used: zero dividend yield; expected volatility of 25 percent;
risk-free interest rate of six percent; and expected life of 10 years.
F-17
<PAGE>
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE H--SHAREHOLDERS' EQUITY (CONTINUED)
WARRANTS
In connection with private placements of subordinated notes payable in 1993
and 1994, warrants to purchase 374,680 shares of the Company's common stock were
issued to the debt holders. Of these warrants, 50,000 were issued at $2.50 per
share and expire in June 1998, and 324,680 were issued at $1.88 per share and
expire in April 1999.
In connection with the extension of $3.4 million in subordinated notes
payable in May 1996, warrants to purchase 341,347 shares of the Company's common
stock at an exercise price of $1.81 per share were issued to the debt holders.
The warrants expire in 2001.
In the aggregate, warrants to purchase 716,027 shares of common stock were
exercisable at December 27, 1996 and September 26, 1997.
All of the warrants contain a provision for the warrants to be terminated if
not exercised within 30 days after a sale, dissolution, public offering, merger
or consolidation of the Company.
STOCK SPLIT
The Company's Board of Directors approved a one-for-ten reverse stock split
which was approved by the shareholders on March 5, 1997. All share and per share
amounts have been restated to reflect the effect of the reverse stock split.
NOTE I--ADVERTISING EXPENSE
Selling, general and administrative expenses include advertising expenses of
$15.4 million, $21.6 million, $19.5 million, $12.7 million and $17.0 million for
fiscal years 1994, 1995 and 1996 and thirty-nine weeks ended September 27, 1996
and September 26, 1997.
NOTE J--EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS' REPORT
On April 18, 1997 the Company entered into an Amended and Restated Credit
and Security Agreement ("the amended agreement") with its bank which expires in
May 2000. The amended agreement contains substantially the same terms and
conditions as the previous agreement except that the maximum borrowing under the
line of credit was increased from $10.0 million to $15.0 million, the interest
rate was reduced to the bank's prime rate and the limit on letters of credit was
increased from $1.0 million to $5.0 million. The amended credit facility has an
increased collateral base related to inventory of $10.0 million December 16
through March 31, $12.0 million April 1 through April 15 and $15.0 million April
16 to December 15 of each year. In September 1997, the Company further amended
its credit facility to provide a revolving line of credit up to $16.5 million,
subject to an adequate borrowing base. The additional $1.5 million of
availability expired on December 15, 1997. All other terms and conditions
remained substantially the same as in the previous agreement.
On June 20, 1997 the Company's Board of Directors approved increasing the
number of shares reserved for issuance under the 1996 Plan from 400,000 to
600,000, subject to shareholder approval which was obtained on July 16, 1997.
F-18
<PAGE>
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE J--EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS' REPORT (CONTINUED)
On July 1, 1997 the Company's Board of Directors approved the grant to
officers of the Company options to purchase 220,000 shares of common stock
contingent upon the completion of the Company's public offering. The exercise
price will be the same as the price to public in the offering document and 25%
of the options will vest immediately upon the date of grant with the balance
vesting over the next three years. The options will expire ten years from the
date of grant.
On July 1, 1997 the Company's Board of Directors approved the repurchase of
all of the Company's Series A Preferred Stock for $1.0 million upon completion
of the Company's public offering.
In July 1997 the Company entered into employment agreements with five of its
officers. The agreements contain various terms and conditions including a
provision for the officers to receive up to three years of base salary upon the
occurrence of certain events as defined in the agreements. The agreements
provide for automatic annual renewals unless two months' prior written notice is
provided by the Company or the officer.
F-19
<PAGE>
[INSIDE BACK COVER]
[The Sportsman's Guide Logo]
[Sample ads from the Company's catalogs]
[Photograph of 2-piece rainsuit]
[Rainfair -Registered Trademark- Inc. Logo]
FACTORY
CLOSE-OUT!
SAVE 20%!
SNICKER AND SNEER AT THE RAIN! ARNOLD PALMER'S DELUXE 2-PC.
RAINSUIT IS 100% WATERPROOF TO KEEP YOU DESERT DRY.
LOW AS $19.97!
AM I ALL WET? HECK NO!
I was "johnny-on-the-spot" to land this Arnold Palmer Rainsuit. Turns out it
was a discontinued Close-Out model. I got the lot. And now you can save on a
100% WATERPROOF 2-PC. SUIT that's going to keep you dry as a bone, whether
you golf or not. Anyway, the single ply PVC suit has heat-welded seams that
lock out moisture. THE BLACK AND FOREST GREEN JACKET has full-cut sleeves, a
zippered front, and twin pockets. The back yoke has air vents for cool
breathability. The elastic waist and cuffs block out wind. THE BLACK PANTS
have a full elastic waist and adjustable leg cuffs for a comfortable fit.
ORDER YOUR NEW ARNOLD PALMER RAINSUIT TODAY, SO SOGGY WEATHER DOESN'T DAMPEN
YOUR OUTDOOR FUN. STATE SIZE: Lg., XL or 2XL. !!!FACTORY CLOSE-OUT/LIMITED
QUANTITIES!!! Compare at $25.00
P7-22223X-Arnold Palmer Rainsuit-
Sizes Lg. or XL.............................CLOSE-OUT $19.97
(G.O.'s Club $17.97)
--------------------------------------------------------------
Size 2XL....................................CLOSE-OUT $24.97
(G.O.'s Club $22.47)
READ THIS!
EVERY BIT AS COMFORTABLE AS YOUR FAVORITE RECLINER BUT IT WON'T ROT WHEN IT
RAINS! FOLDING PATIO LOUNGE CHAIR ADJUSTS TO 5 DIFFERENT POSITIONS!
Look, Bubba, you can't spend every day parked in your favorite recliner,
wolfing down french fries and staring at your pasty white thighs. IT'S TIME
YOU GOT SOME SUN! So set up the portable TV on the deck or the patio and
plop down on this comfort maker. Durable high-impact plastic construction is
guaranteed against cracks and defects for a full 5 years! Lift up on the
handle and you can set it at one of five different positions...from sitting
straight...to partial reclining when it's nap time. Folds away for storage
or when you want to take it to the beach. Measures 25x41 1/2x44" and weighs
a light 15 lbs. YOU'LL PAY $50.00 FOR ONE OF THESE CHAIRS LOCALLY, BUT YOU
CAN GET 2 OF 'EM FROM ME FOR THAT PRICE! CALL TODAY!
P7-22982-Folding Patio Lounge Chair
Compare at $50.00..............................SPECIAL $29.97
(G.O.'s Club $26.97)
SAVE $9.94! BUY 2 FOR $50/2
5-position
comfort
[Photograph with inset showing two different positions of Lounge Chair]
READ THIS!
YOUR SHIP'S JUST COME IN! "WHAT...I WON THE LOTTERY?" NOPE...BETTER YET! NOW
YOU CAN SAVE $30.00 BUCKS ON GREAT-LOOKING, RUGGED, EASY-CARE
DOCKERS-REGISTERED TRADEMARK- MOC SHOES!
NEW! [Dockers -Registered Trademark- LOGO]
[Photograph of One-eye Moc Shoes]
Top quality, casual comfort. Who knows that tradition better than Dockers?
Heck, they practically INVENTED great-looking casual work wear. What's more,
SINCE THESE ARE LAST YEAR'S MODELS, YOU CAN SAVE A WHOPPING $30.00 OFF THESE
DOCKERS ONE-EYE MOC SHOES. Now isn't that a lot better than winning the
lottery? Okay, so I fudged a little. I'd rather win the lottery too...but,
this is still A GREAT DEAL ON RUGGED LEATHER BOAT SHOES FROM ONE OF THE BEST
NAMES IN THE BUSINESS!
-Soft, yet rugged, unlined pebbled full grain brown leather uppers
-ARCH-SUPPORTING, CONTOURED, LEATHER COVERED INSOLES
-Shock-absorbent EVA midsoles
-DUAL DENSITY, FLEXIBLE RUBBER MINI-LUG OUTSOLES
-Classic slip-on Moc Shoe styling...combined with a leather tie
-Each stands 4" tall, with a 1/2" heel and weighs just 16 ozs.
YOU KNOW YOU CAN'T GO WRONG WITH DOCKERS...ESPECIALLY AT MY
BLOW-THE-COMPETITION-OUT-OF-THE-WATER-PRICE OF LESS THAN 40 BILLS! STATE
SIZE: 7 1/2, 8, 8 1/2, 9, 9 1/2, 10, 10 1/2, 11, 11 1/2, 12 or 13. Come in
medium width. Order your normal size. Hurry! !!!FACTORY CLOSE-OUT/LIMITED
QUANTITIES!!!
Compare at $70.00
P7-23302X-Brown Dockers-Registered Trademark- One-eye Moc
Shoes............................CLOSE-OUT $39.97
(G.O.'s Club $35.97)
The "Fun-to-Read" Catalog -TM-
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING SHAREHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR SOLICITATION BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO
ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE AFFAIRS OF THE COMPANY SINCE THE
DATE HEREOF OR THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 2
Risk Factors.............................................................. 5
Dilution.................................................................. 11
Use of Proceeds........................................................... 12
Price Range of Common Stock............................................... 13
Dividend Policy........................................................... 13
Capitalization............................................................ 14
Selected Financial Data................................................... 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 16
Business.................................................................. 22
Management................................................................ 31
Certain Transactions...................................................... 36
Principal and Selling Shareholders........................................ 38
Description of Capital Stock.............................................. 41
Shares Eligible for Future Sale........................................... 42
Underwriting.............................................................. 45
Legal Matters............................................................. 46
Experts................................................................... 46
Available Information..................................................... 47
Documents Incorporated by Reference....................................... 47
Index to Financial Statements............................................. F-1
</TABLE>
2,000,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
CRUTTENDEN ROTH
I N C O R P O R A T E D
JOHN G. KINNARD AND COMPANY,
I N C O R P O R A T E D
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the issuance and distribution of
the securities being registered, other than underwriting discounts and
commissions are as follows:
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 5,576
NASD filing fees.................................................. 2,340
Nasdaq listing fee................................................ 24,798
Printing fees..................................................... 100,000
Legal fees and expenses........................................... 250,000
Accounting fees and expenses...................................... 145,000
Blue Sky fees and expenses (including fees of counsel)............ 10,000
Transfer agent and registrar fees................................. 2,000
Representatives' non-accountable expense allowance................ 320,000
Directors and officers liability insurance........................ 100,000
Miscellaneous expenses............................................ 20,286
---------
Total............................................................. $ 980,000*
---------
---------
</TABLE>
- ------------------------
* The Selling Shareholders named herein will pay the expenses of the offering
attributable to the Common Stock being sold by them and the fees of their
counsel and other representatives (other than the Representatives'
non-accountable expense allowance and directors and officers liability
insurance premium which will be paid by the Company), in addition to the
underwriting discount on the Common Stock to be sold by them.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 302A.521 of the Minnesota Business Corporation Act ("MBCA"),
unless the articles of incorporation or bylaws otherwise provide, a corporation
is required to indemnify its directors, officers and employees against
judgments, penalties, fines, settlements and reasonable expenses (including
attorneys' fees) incurred in connection with legal proceedings if (i) they have
not been indemnified by another organization, (ii) they acted in good faith,
(iii) they received no improper personal benefit, (iv) in the case of any
criminal proceeding, they had no reasonable cause to believe their conduct was
unlawful and (v) generally speaking, they reasonably believed their conduct to
be in the corporation's best interests. A corporation shall advance expenses if
the director, officer or other individual furnishes a written affirmation of his
or her good faith belief that he or she has met the applicable statutory
standards for indemnification, he or she furnishes a written undertaking to
repay such amount if it shall ultimately be determined that he or she is not
entitled to be indemnified by the corporation and a determination is made that
the facts then known would not preclude indemnification. The registrant's Bylaws
provide indemnification to directors, officers, employees and agents to the full
extent permitted by the MBCA.
Under Section 302A.521, a corporation may purchase and maintain insurance on
behalf of a person in that person's official capacity against any liability
asserted against and incurred by the person in or arising from that capacity,
whether or not the corporation would have been required to indemnify the person
against the liability under the provisions of that section. The registrant
maintains directors and officers liability insurance coverage.
Section 302A.251 of the MBCA permits a corporation to eliminate or limit the
personal liability of a director to the corporation or its shareholders for
monetary damages for breach of fiduciary duty as a director through a provision
in the corporation's articles of incorporation, except liability for (i) breach
of a
II-1
<PAGE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. (CONTINUED)
director's duty of loyalty, (ii) acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (iii) the payment
of unlawful distributions or violations of the Minnesota securities laws, (iv)
any transaction from which the director derived an improper personal benefit or
(v) any act or omission occurring prior to adoption of the provision in the
articles providing for such limitation of liability. The registrant's Articles
of Incorporation provide that, to the fullest extent permitted by the MBCA, a
director shall not be liable to the registrant or its shareholders for monetary
damages for breach of fiduciary duty as a director.
ITEM 16. EXHIBITS.
See Exhibit Index on Page II-4.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 15 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this amendment to the
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of South St. Paul, State of Minnesota, on January
2, 1998.
THE SPORTSMAN'S GUIDE, INC.
By /s/ GARY OLEN
-----------------------------------------
Gary Olen
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
- ------------------------------ -------------------------- -------------------
VINCENT W. SHIEL*
- ------------------------------ Chairman of the Board
Vincent W. Shiel
President, Chief Executive
/s/ GARY OLEN Officer and Director
- ------------------------------ (principal executive
Gary Olen officer)
Senior Vice President of
Finance, Chief Financial
/s/ CHARLES B. LINGEN Officer, Secretary,
- ------------------------------ Treasurer and Director
Charles B. Lingen (principal financial and
accounting officer)
January 2, 1998
Executive Vice President,
- ------------------------------ Chief Operating Officer
Gregory R. Binkley and Director
MARK F. KROGER*
- ------------------------------ Director
Mark F. Kroger
LEONARD M. PALETZ*
- ------------------------------ Director
Leonard M. Paletz
WILLIAM T. SENA*
- ------------------------------ Director
William T. Sena
*By /s/ GARY OLEN
-------------------------
Gary Olen,
Attorney-In-Fact
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
- ----------- -------------------------------------------------------------------------------------------------- -----------
<C> <S> <C>
2.1 Form of Underwriting Agreement, including form of Representatives' Warrant*.......................
3.1 Restated Articles of Incorporation as restated through March 5, 1997 (incorporated by reference
from Exhibit 3.1 to Form 10-K for the year ended December 27, 1996, File No. 0-15767)
3.2 Bylaws (incorporated by reference from Exhibit 3.2 to Form S-18 Registration Statement No.
33-4496C filed April 1, 1986)
4.1 Specimen of the Company's Common Stock certificate (incorporated by reference from Exhibit 4.1 to
Amendment No. 1 to Form S-18 Registration Statement No. 33-4496C filed May 8, 1986)
4.2 Form of Promissory Note dated April 18, 1997 issued by the Company (incorporated by reference from
Exhibit 4.2 to Form 10-Q for the quarter ended March 28, 1997)
5.1 Opinion of Chernesky, Heyman & Kress P.L.L.**
10.1 Letter of agreement between Vincent W. Shiel and the Company dated September 8, 1989 (incorporated
by reference from Exhibit 19.1 to Form 10-Q for the quarter ended September 29, 1989)
10.2 Consulting Agreement dated January 11, 1990 between the Company and Outdoor Consulting, Inc.
(incorporated by reference from Exhibit 10.16 to Form 10-K for the year ended December 29, 1989)
10.3 The Company's 1991 Incentive Stock Option Plan (incorporated by reference from Exhibit 10.16 to
Form 10-K for the year ended December 27, 1991)
10.4 Agreement between the Company and Gary Olen dated July 1, 1992 granting the use of Mr. Olen's
name, picture and likeness (incorporated by reference from Exhibit 10.19 to Form 10-K for the
year ended January 1, 1993)
10.5 Option Agreement between the Company and Gary Olen dated July 1, 1993 (incorporated by reference
from Exhibit 10.18 to Form 10-K for the year ended December 31, 1993)
10.6 Industrial Real Estate Lease between the Company and CB Commercial Real Estate Group, Inc. dated
April 22, 1993 (incorporated by reference from Exhibit 10.20 to Form 10-K for the year ended
December 31, 1993)
10.7 Amended and Restated Credit and Security Agreement between the Company and Norwest Business
Credit, Inc. dated April 18, 1997 (incorporated by reference from Exhibit 10.16 to Form 10-Q for
the quarter ended March 28, 1997)
10.8 Form of Stock Option Agreement pursuant to the Company's 1994 Non-Qualified Performance Option
Plan (incorporated by reference from Exhibit 10.16 to Form 10-K for the year ended December 27,
1996)
10.9 The Company's 1996 Stock Option Plan (incorporated by reference from Exhibit 10.17 to Form 10-K
for the year ended December 27, 1996)
10.10 Form of Employment Agreement with members of senior management*...................................
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
- ----------- -------------------------------------------------------------------------------------------------- -----------
<C> <S> <C>
23.1 Consent of Grant Thornton LLP*....................................................................
23.2 Consent of Chernesky, Heyman & Kress P.L.L. (included in Exhibit 5.1)
24.1 Powers of Attorney of each person who signed this registration statement on behalf of another
pursuant to a power of attorney**
</TABLE>
- ------------------------
* Filed herewith
** Previously filed
II-5
<PAGE>
Draft 1/2/98
2,000,000 SHARES
THE SPORTSMAN'S GUIDE, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
Febuary ___, 1998
CRUTTENDEN ROTH INCORPORATED
JOHN G. KINNARD AND COMPANY, INCORPORATED
As Representatives of the Several Underwriters
c/o Cruttenden Roth Incorporated
1050 17th Street, Suite 1900
Denver, Colorado 80265
Ladies and Gentlemen:
The Sportsman's Guide, Inc., a Minnesota corporation (the "Company")
and the shareholders of the Company named in Schedule II hereto (the "Selling
Shareholders") propose to sell to the several underwriters named in Schedule
I hereto (the "Underwriters"), for whom you are acting as representatives
(the "Representatives"), an aggregate of Two Million (2,000,000) shares (the
"Firm Shares") of Common Stock, $.01 par value, of the Company (the "Common
Stock"), of which 1,600,000 shares will be sold by the Company and 400,000
shares will be sold by the Selling Shareholders. The respective amounts of
the Firm Shares to be so purchased by the several Underwriters are set forth
opposite their names in Schedule I hereto, and the respective amounts to be
sold by the Selling Shareholders are set forth opposite their names in
Schedule II hereto. The Company and the Selling Shareholders are sometimes
referred to herein collectively as the "Sellers." In addition, to cover
overallotments in connection with the sale of the Firm Shares, the Selling
Shareholders propose, subject to the terms and conditions stated herein, to
grant to the Underwriters an option to purchase an additional number of
shares not exceeding 300,000 in the aggregate. The shares subject to such
option are herein called the "Option Shares." The respective amounts of
Option Shares to be sold by the Selling Shareholders are set forth opposite
their names in Schedule II hereto. The Firm Shares and any Option Shares
purchased pursuant to this Agreement are herein called the "Shares." As used
in this Agreement, the term "Underwriter" includes any party substituted for
an Underwriter under Section 9 hereof.
<PAGE>
As Representatives, you have advised the Company and the Selling
Shareholders (i) that you are authorized to enter into this Agreement on
behalf of the Underwriters and (ii) that the Underwriters are willing, acting
severally and not jointly, to purchase the numbers of Firm Shares,
aggregating in total 2,000,000 shares, set forth opposite their respective
names in Schedule I, plus their pro rata portion of the Option Shares
purchased if you elect to exercise the overallotment option in whole or in
part for the accounts of the Underwriters.
The Company hereby confirms its agreement to issue to the
Representatives a warrant for the purchase of 100,000 shares of the Company's
Common Stock as described in Section 5 hereof (the "Representatives'
Warrant"), contingent upon the purchase by the Underwriters of the Firm
Shares. The shares issuable upon exercise of the Representatives' Warrant
are referred to in this Agreement as the "Warrant Shares."
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-2 (File No. 333--31111) and
a related preliminary prospectus for the registration of the Shares under the
Securities Act of 1933, as amended (the "Act"). If the Company has elected
to rely upon Rule 462(b) under the Act to increase the size of the offering
registered under the Act, the Company will prepare and file with the
Commission a registration statement with respect to such increase pursuant to
Rule 462(b). The registration statement, as amended, including a registration
statement (if any) filed pursuant to Rule 462(b) under the Act and the
information (if any) deemed to be part thereof pursuant to Rules 430A and
434(d) under the Act, is herein called the "Registration Statement." The
prospectus included in the Registration Statement at the time it is or was
declared effective by the Commission is hereinafter called the "Prospectus,"
except that if any prospectus (including any term sheet meeting the
requirements of Rule 434 under the Act provided by the Company for use with a
prospectus subject to completion within the meaning of Rule 434 in order to
meet the requirements of Section 10(a) of the Act) filed by the Company with
the Commission pursuant to Rule 424(b) (and Rule 434, if applicable) under
the Act or any other such prospectus provided to the Underwriters by the
Company for use in connection with the offering of the Shares (whether or not
required to be filed by the Company with the Commission pursuant to Rule
424(b) under the Act) differs from the prospectus on file at the time the
Registration Statement is or was declared effective by the Commission, the
term "Prospectus" shall refer to such differing prospectus (including any
term sheet within the meaning of Rule 434 under the Act) from and after the
time such prospectus is filed with the Commission or transmitted to the
Commission for filing pursuant to Rule 424(b) (and Rule 434, if applicable)
or from and after the time it is first provided to the Underwriters by the
Company for such use. The term "Preliminary Prospectus" as used herein means
any preliminary prospectus included in the Registration Statement prior to
the time it becomes or became effective under the Act and any prospectus
subject to completion as described in Rule 430A or Rule 434 under the Act.
Copies of the Registration
-2-
<PAGE>
Statement, including all exhibits and schedules thereto, any amendments
thereto and all Preliminary Prospectuses have been delivered to you.
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
SHAREHOLDERS.
(a) The Company represents and warrants to, and agrees with, each
of the Underwriters that:
(i) The Registration Statement has been declared effective under
the Act, and no post-effective amendment to the Registration Statement
has been filed as of the date of this Agreement. No stop order suspending
the effectiveness of the Registration Statement has been issued and no
proceeding for that purpose has been instituted or threatened by the
Commission.
(ii) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material
respects to the requirements of the Act and the rules and regulations of
the Commission promulgated thereunder, and did not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading; provided,
however, that the Company makes no representation or warranty as to
information contained in or omitted in reliance upon, and in conformity
with, written information furnished to the Company by or on behalf of any
Underwriter through the Representatives, or by or on behalf of any Selling
Shareholder, expressly for use in the preparation thereof.
(iii) As of the time the Registration Statement was declared effective
by the Commission, upon the filing or first delivery to the Underwriters
of the Prospectus and at the First Closing Date and Second Closing Date
(each as hereinafter defined), (A) the Registration Statement and
Prospectus conformed or will conform in all material respects to the
requirements of the Act and the rules and regulations of the Commission
promulgated thereunder, (B) the Registration Statement did not or will not
include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading, and (C) the Prospectus did not or will not include
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances in which they are or were made, not
misleading; provided, however, that the Company makes no representation or
warranty as to information contained in or omitted from the
-3-
<PAGE>
Registration Statement or the Prospectus, or any such amendment or
supplement, in reliance upon, and in conformity with, written information
furnished to the Company by or on behalf of any Underwriter through the
Representatives, or by or on behalf of any Selling Shareholder, expressly
for use in the preparation thereof.
(iv) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Minnesota.
The Company owns no capital stock or other equity or ownership or
proprietary interest in any corporation, partnership, association, trust
or other entity. The Company has the power and authority to own or lease
its properties and conduct its business as described in the Prospectus,
and is duly qualified to transact business in all jurisdictions in which
the conduct of its business or its ownership or leasing of property
requires such qualification and the failure so to qualify would have a
material adverse effect on the condition (financial or otherwise),
business, property, prospects, net worth or results of operations of the
Company.
(v) The outstanding shares of capital stock of the Company have been
duly authorized and validly issued and are fully paid and nonassessable.
The Shares to be issued and sold by the Company to the Underwriters
pursuant to this Agreement have been duly authorized and, when issued and
paid for as contemplated herein, will be validly issued, fully paid and
nonassessable. The Warrant Shares have been duly authorized and reserved
for issuance and, when issued and paid for pursuant to the terms of the
Representatives' Warrant, will be validly issued, fully paid and
nonassessable. Except as described in the Prospectus, there are no
preemptive rights or other rights to subscribe for or to purchase, or any
restriction upon the voting or transfer of, any shares of capital stock of
the Company pursuant to the Company's Articles of Incorporation, Bylaws or
any agreement or other instrument to which the Company is a party or by
which the Company is bound. Neither the filing of the Registration
Statement nor the offering or the sale of the Shares as contemplated by
this Agreement gives rise to any rights for, or relating to, the
registration of any shares of capital stock or other securities of the
Company, except such rights which have been validly waived or satisfied.
Except as described in the Prospectus, there are no outstanding options,
warrants, agreements, contracts or other rights to purchase or acquire
from the Company any shares of its capital stock. The Company has an
authorized and outstanding capitalization as set forth under the heading
"Capitalization" in the Prospectus. The outstanding capital stock of the
Company conforms, and the Shares to be issued by the Company to the
Underwriters will conform, to the description thereof contained in the
Prospectus.
-4-
<PAGE>
(vi) The financial statements (together with the notes thereto)
included in the Registration Statement and Prospectus comply in all
material respects with the requirements of the Act and present fairly the
financial position, results of operations and changes in stockholders'
equity and cash flows of the Company on the basis stated in the
Registration Statement, at the indicated dates and for the indicated
periods. Such financial statements have been prepared in accordance with
generally accepted accounting principles consistently applied throughout
the periods involved, and all adjustments necessary for a fair
presentation of results for such periods have been made, except as
otherwise stated therein. No other financial statements or schedules are
required to be included in the Registration Statement. The summary and
selected consolidated financial data included in the Registration
Statement present fairly the information shown therein on the basis stated
in the Registration Statement and have been compiled on a basis consistent
with the financial statements presented therein. Grant Thornton LLP,
which has expressed its opinion with respect to the financial statements
filed with the Commission as part of the Registration Statement, are
independent public accountants as required by the Act and the rules and
regulations of the Commission promulgated thereunder.
(vii) There is no action or proceeding pending or, to the knowledge
of the Company, threatened or contemplated against the Company before any
court or administrative or regulatory agency, authority or body, or any
arbitrator, which might result, individually or in the aggregate, in a
material adverse change in the condition (financial or otherwise),
business, property, prospects, net worth or results of operations of the
Company, except as set forth in the Registration Statement and the
Prospectus.
(viii) The Company has good and marketable title to all properties
and assets reflected as owned in the financial statements hereinabove
described or in the Prospectus, in each case free and clear of all liens,
encumbrances, claims, security interests or defects, except such as are
described in the Prospectus or do not substantially affect the value of
such properties and assets and do not materially interfere with the use
made and proposed to be made of such properties and assets by the Company;
and any real property and buildings held under lease by the Company are
held under valid, subsisting and enforceable leases with only such
exceptions with respect to any particular lease as are not material and
do not interfere in any material respect with the use made and proposed to
be made of such property and buildings by the Company.
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(ix) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, (A) there has not been any
material adverse change in or affecting, or any event, occurrence or
development in the business of the Company that, taken together with
other events, occurrences and developments with respect to such
business, would have or would reasonably be expected to have a material
adverse effect on, the general affairs, condition (financial or
otherwise), business, key personnel, property, prospects, net worth
or results of operations of the Company (whether or not occurring in
the ordinary course of business), (B) the Company has not entered
into any transaction not in the ordinary course of business that is
material to the Company, other than transactions described in the
Registration Statement and the Prospectus, (C) the Company has not
incurred any material liabilities or obligations, direct or
contingent, (D) the Company has not sustained any material loss
or interference with its business or properties from fire, flood,
windstorm, accident or other calamity, whether or not covered by
insurance, (E) there has not been any change in the capital stock
of the Company (other than upon the exercise of options and warrants
described in the Registration Statement and the Prospectus), or any
material increase in the short-term or long-term debt (including
capitalized lease obligations) of the Company other than increases in
debt incurred in the ordinary course of business, and (F) there has
not been any issuance of warrants, options, convertible securities
or other rights to purchase or acquire any capital stock of the Company.
(x) The Company is not in violation of or in default under its
Articles of Incorporation or Bylaws, or any statute, rule, regulation,
order, judgment, decree or authorization of any governmental entity or
administrative agency, court or other body having jurisdiction over the
Company or any of its properties, or any indenture, mortgage, deed of
trust, loan agreement, lease, franchise, license or other agreement or
instrument to which the Company is a party or by which it is bound or to
which any property or assets of the Company are subject, which violation
or default would have a material adverse effect on the business, condition
(financial or otherwise), results of operations, shareholders' equity or
prospects of the Company or the ability of the Company to consummate the
transactions contemplated hereby.
(xi) The Company has the power and authority to enter into this
Agreement and to consummate the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company,
and constitutes a valid, legal and binding obligation of the Company,
enforceable in accordance with its terms, except as rights to indemnity
hereunder may be limited by federal or state securities laws and except
as such enforceability may be limited by bankruptcy, insolvency,
reorganization or similar laws affecting the rights of
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creditors generally and subject to general principles of equity. The
execution, delivery and performance of this Agreement and the
consummation of the transactions herein contemplated (A) will not
result in a breach or violation of any provision of the Articles of
Incorporation or Bylaws of the Company or any statute, rule,
regulation, order, judgment, decree or authorization of any
governmental or administrative agency, court or other body having
jurisdiction over the Company or any of its properties, and (B) will not
conflict with, result in a breach or violation of, or constitute, either
by itself or upon notice or passage of time or both, a default under any
indenture, mortgage, deed of trust, loan agreement, lease, franchise,
license or other agreement or instrument to which the Company is a party
or by which the Company is bound or to which any property or assets of the
Company are subject. No approval, consent, order, authorization,
designation, declaration or filing by or with any governmental or
administrative agency, court or other body is required for the execution
and delivery by the Company of this Agreement and the consummation of the
transactions herein contemplated, except as may be required under the Act
or any state securities or blue sky laws.
(xii) The Company holds and is operating in compliance with all
licenses, authorizations, approvals, certificates and permits from
governmental and regulatory authorities, foreign and domestic, which are
necessary to the conduct of its business as described in the Prospectus,
except where the failure to comply would not have a material adverse
effect on the business, condition (financial or otherwise), results of
operations, shareholders' equity or prospects of the Company; and all such
licenses, authorizations, approvals, certificates and permits are in full
force and effect.
(xiii) No labor disturbance or dispute by the employees or consultants
or contractors to the Company exists or, to the Company's knowledge, is
threatened that could reasonably be expected to have a material adverse
effect on the conduct of the Company's business as described in the
Prospectus or on the condition (financial or otherwise), property,
prospects, net worth or results of operations of the Company.
(xiv) The Company has the power and authority to enter into the
Representatives' Warrant and to issue and sell the Warrant Shares as
contemplated thereby. The Representatives' Warrant and the Warrant Shares
have been duly authorized. The Representatives' Warrant, when issued and
delivered to the Representatives, will constitute a valid and binding
obligation of the Company, enforceable in accordance with its terms,
except as such enforceability may be limited by bankruptcy, insolvency,
reorganization or similar laws affecting the rights of creditors generally
and subject to general principles of equity.
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(xv) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (A) transactions are
executed in accordance with management's general or specific
authorization, (B) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets,
(C) access to assets is permitted only in accordance with management's
general or specific authorization, and (D) the recorded accountability
for assets is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(xvi) The Company has not taken and will not take, directly or
indirectly, any action designed to, or which has constituted, or which
might reasonably be expected to cause or result in, stabilization or
manipulation of the price of the Common Stock.
(xvii) The Company's application for listing on the Nasdaq National
Market ("Nasdaq") has been approved.
(xviii) The Company has obtained and delivered to the Representatives
written agreements, in form and substance satisfactory to the
Representatives, of each of its directors and executive officers and the
shareholders named in Schedule III hereto, that no offer, sale, contract
to sell, other disposition of any Common Stock of the Company will be
made for a period of 180 days after the effective date of the Registration
Statement, directly or indirectly, by such holder otherwise than with the
prior written consent of John G. Kinnard and Company, Incorporated
("Kinnard"), which right to consent has been transferred to Cruttenden
Roth Incorporated ("Cruttenden").
(xix) The Company has not distributed and will not distribute any
prospectus or other offering material in connection with the offering
and sale of the Shares other than any Preliminary Prospectus or the
Prospectus or other materials permitted by the Act to be distributed
by the Company.
(xx) The Company has filed all federal, state, local and foreign
tax returns or reports required to be filed by it (except in any case in
which the failure so to file would not have a material adverse effect on
the Company) and has paid in full all taxes indicated by said returns or
reports and all assessments received by it to the extent that such taxes
have become due and payable, except where the Company is contesting in
good faith such taxes and assessments.
(xxi) The Company maintains insurance of the type and in the amounts
generally deemed adequate for its business and consistent
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with insurance coverage maintained by similar companies and businesses,
including without limitation, product liability insurance and insurance
covering all real and personal property owned or leased by it, all of
which is in full force and effect.
(xxii) The Company owns or is licensed to use all inventions,
trademarks, tradenames, applications for registration of trademarks,
copyrights, know-how, trade secrets, licenses and rights in any thereof
that are material to the business of the Company as now conducted and as
proposed to be conducted, in each case as described in the Prospectus
(the "Proprietary Rights"). The Company does not have knowledge of, and
the Company has not given or received any notice of any pending conflicts
with or infringement of, the rights of others with respect to any
Proprietary Rights or with respect to any license of Proprietary Rights.
No action, suit, arbitration or legal, administrative or other proceeding,
or domestic or foreign governmental investigation involving any
Proprietary Rights is pending or, to the best of the Company's knowledge,
is threatened. The Company is not subject to any judgment, order, writ,
injunction or decree of any court or any federal, state, local, foreign or
other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, or any arbitrator, or has entered
into or is a party to any contract which restricts or impairs the use of
any such Proprietary Rights. To the best of the Company's knowledge, no
Proprietary Rights used by the Company conflict with or infringe upon any
proprietary rights of or available to any third party. Except as otherwise
disclosed in writing to the Representatives, the Company has not received
written notice of any pending conflict with or infringement upon such
third-party proprietary rights. The Company has not entered into any
consent, indemnification, forbearance to sue or settlement agreement with
respect to Proprietary Rights other than in the ordinary course of
business. No claims have been asserted by any person with respect to the
validity of or the Company's ownership or right to use the Proprietary
Rights and, to the best knowledge of the Company, there is no reasonable
basis for any such claim to be successful. The Proprietary Rights are
valid and enforceable and no registration relating thereto has lapsed,
expired or been abandoned or cancelled or is the subject of cancellation
or other adversarial proceedings, and all applications therefor are
pending and are in good standing. The Company has complied with its
respective contractual obligations relating to the protection of any
Proprietary Rights used pursuant to licenses. To the knowledge of the
Company, no person is infringing on or violating the Proprietary Rights
owned or used by the Company.
(xxiii) To the Company's knowledge, none of the Company's officers,
directors or 5% shareholders has any affiliations with the
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National Association of Securities Dealers, Inc., except as set forth
in the Registration Statement or as otherwise disclosed in writing to
the Representatives.
(xxiv) The Company intends to apply the proceeds from the sale of the
Shares by it to the purposes and substantially in the manner set forth in
the Prospectus.
(xxv) No person is entitled, directly or indirectly, to compensation
from the Company or the Underwriters for services as a finder in
connection with the transactions contemplated by this Agreement.
(xxvi) The conditions for use of a registration statement on Form
S-2 for the distribution of the Shares have been satisfied with respect to
the Company.
(xxvii) The Company has not sold any securities in violation of
Section 5 of the Act.
(xxviii) The Company has complied and will comply with all provisions
of Florida Statutes Section 517.075 (Chapter 92-198, Laws of Florida).
Neither the Company, nor any affiliate thereof, does business with the
government of Cuba or with any person or affiliate located in Cuba.
(b) Any certificate signed by any officer of the Company and delivered
to the Representatives or counsel to the Underwriters shall be deemed to be a
representation and warranty of the Company to each Underwriter as to
the matters covered thereby.
(c) Each of the Selling Shareholders severally, but not jointly,
represents and warrants to and agrees with each of the Underwriters as
follows:
(i) The Selling Shareholder has duly executed a Custody Agreement
("Custody Agreement") between the Selling Shareholder and Corporate Stock
Transfer, Inc. as Custodian (the "Custodian"), and a Power of Attorney
("Power of Attorney") appointing Gary Olen and Charles B. Lingen, and
each of them, as attorneys-in-fact (the "Attorneys-in-Fact") with
authority to execute and deliver this Agreement on behalf of the
Selling Shareholder and to take certain other actions with respect
thereto.
(ii) The Selling Shareholder now has, and at the First or Second
Closing Date (as the case may be) will have, good and valid title to the
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Shares to be sold by such Selling Shareholder, free and clear of any
liens, encumbrances, equities and claims, and full right, power and
authority to effect the sale and delivery of such Shares. The
certificates representing such Shares, which have been deposited by the
Selling Shareholder with the Custodian, were duly and properly endorsed in
blank for transfer, or were accompanied by all documents, duly and
properly executed, necessary to validate the transfer of title thereto to
the Underwriters, free of any legend, restriction on transferability,
proxy, lien, encumbrance, equity or claim whatsoever; and, upon the
delivery of, and against payment for, such Shares pursuant to this
Agreement, the Underwriters will acquire good and valid title thereto,
free and clear of any legends, liens, restrictions on transferability,
proxies, encumbrances, equities or claims.
(iii) The Selling Shareholder is disposing of the Shares held by
him or her for his or her account and is not selling such Shares,
directly or indirectly, for the benefit of the Company or the
Underwriters, and no part of the proceeds of such sale received by
such Selling Shareholder will inure, either directly or indirectly,
to the benefit of the Company.
(iv) The Selling Shareholder has full right, power and authority to
execute and deliver this Agreement, the Power of Attorney, and the Custody
Agreement and to perform the obligations of the Selling Shareholder under
this Agreement, the Power of Attorney and the Custody Agreement. This
Agreement, the Power of Attorney and the Custody Agreement are each a
valid and binding obligation of such Selling Shareholder, except as the
obligations of the Selling Shareholder under the indemnification and
contribution provisions hereof may be limited under federal securities
laws. The execution and delivery of this Agreement and the consummation by
such Selling Shareholder of the transactions herein contemplated and the
fulfillment by such Selling Shareholder of the terms hereof will not
require any consent, approval, authorization, or other order of any court,
regulatory body, administrative agency or other governmental body (except
as may be required under the Act, state securities laws or Blue Sky laws)
and will not result in a breach of any of the terms and provisions of, or
constitute a default under, governing documents of such Selling
Shareholder, if not an individual, any indenture, mortgage, deed of trust
or other agreement or instrument to which such Selling Shareholder is a
party, or, to the knowledge of such Selling Shareholder, any order, rule
or regulation applicable to such Selling Shareholder of any court or of
any regulatory body or administrative agency or other governmental body
having jurisdiction.
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<PAGE>
(v) The Selling Shareholder has not taken and will not take,
directly or indirectly, any action designed to, or which has constituted,
or which might reasonably be expected to cause or result in the
stabilization or manipulation of the price of the Common Stock of the
Company. Other than as permitted by the Act, the Selling Shareholder will
not distribute any prospectus or other offering material in connection
with the offering of the Shares.
(vi) The information pertaining to such Selling Shareholder under
the caption "Principal and Selling Shareholders" in the Prospectus is
complete and accurate in all material respects.
(vii) All information furnished to the Company in writing by the
Selling Shareholder for use in the preparation of the Registration
Statement and Prospectus is true in all material respects and does not
omit any material fact necessary to make such information not misleading.
When the Registration Statement becomes effective, and at all times
subsequent thereto up to and including any Closing Date, the Registration
Statement and the Prospectus, as may be amended or supplemented, will not
contain any untrue statement of a material fact with respect to the
Selling Shareholder or omit, with respect to such Selling Shareholder,
to state a material fact required to be stated therein or necessary to
make the statements therein with respect to the Selling Shareholder not
misleading.
2. PURCHASE AND SALE; DELIVERY AND PAYMENT.
(a) On the basis of the representations, warranties, and agreements
herein contained, but subject to the terms and conditions herein set forth,
the Sellers agree to sell to each of the Underwriters, and the Underwriters
agree, severally and not jointly, to purchase, at a purchase price equal to
ninety-two percent (92%) of the per share price to public of $______, the
respective amount of Firm Shares set forth opposite such Underwriter's name
in Schedule I hereto, subject to adjustments in accordance with Section 9
hereof. The number of Firm Shares to be purchased by each Underwriter from
each Seller shall be as nearly as practicable in the same proportion to the
total number of Firm Shares being sold by each Seller as the number of Firm
Shares being purchased by each Underwriter bears to the total number of Firm
Shares to be sold hereunder. The Underwriters will collectively purchase all
of the Firm Shares if any are purchased.
(b) Certificates in negotiable form for the total number of Shares to
be sold hereunder by the Selling Shareholders have been placed in custody
with the Custodian pursuant to the Custody Agreement executed by each Selling
Shareholder for delivery of all Shares to be sold hereunder by the Selling
Shareholders. Each of the Selling Shareholders specifically agrees that
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<PAGE>
the Shares represented by the certificates held in custody for the Selling
Shareholders under the Custody Agreement are subject to the interests of the
Underwriters hereunder, that the arrangements made by the Selling
Shareholders for such custody are to that extent irrevocable, and that the
obligations of the Selling Shareholders hereunder shall not be terminable by
any act or deed of the Selling Shareholders (or by any other person, firm or
corporation including the Company, the Custodian or the Underwriters) or by
operation of law (including the death of an individual Selling Shareholder
or the dissolution or termination of a Selling Shareholder which is not an
individual person) or by the occurrence of any other event or events, except
as set forth in the Custody Agreement. If any such event should occur prior
to the delivery to the Underwriters of the Shares hereunder, certificates for
the Shares shall be delivered by the Custodian in accordance with the terms
and conditions of this Agreement as if such event has not occurred. The
Custodian is authorized to receive and acknowledge receipt of the proceeds of
sale of the Shares held by it against delivery of such Shares.
(c) On the basis of the representations and warranties herein
contained, but subject to the terms and conditions herein set forth, the
Selling Shareholders hereby grant an option to the Underwriters to purchase
an aggregate of up to 300,000 Option Shares, at the same purchase price as
the Firm Shares, for use solely in covering any overallotments made by the
Underwriters in the sale and distribution of the Firm Shares. The option
granted hereunder may be exercised at any time (but not more than once)
within 30 days after the date on which the Registration Statement was
declared effective under the Act, as described in Section 1(a)(i) hereof (the
"Effective Date") upon notice (confirmed in writing) by the Representatives
to the Company setting forth the aggregate number of Option Shares as to
which the Underwriters are exercising the option and the date on which
certificates for such Option Shares are to be delivered. Option Shares shall
be sold by the Selling Shareholders in the amounts set forth opposite the
name of such Selling Shareholders in Schedule II hereto, and shall be
purchased severally for the account of each Underwriter in proportion to the
number of Firm Shares set forth opposite the name of such Underwriter in
Schedule I hereto.
(d) The Company and the Selling Shareholders will deliver or cause to
be delivered their respective portions of the Firm Shares to the
Representatives at the offices of Dorsey & Whitney LLP, 220 South Sixth
Street, Minneapolis, Minnesota 55402, unless some other place is agreed
upon, at 10:00 a.m., Minneapolis time, against payment of the purchase price
as set forth in Section 2(a) above, on the third full business day after
commencement of the offering or, if the offering commences after 4:30 p.m.,
on the fourth full business day after commencement of the offering, or such
other time as may be agreed upon by the Representatives, the Company and the
Selling Shareholders, such time and place being herein referred to as the
"First Closing Date."
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<PAGE>
(e) The Selling Shareholders will deliver or cause to be delivered
their respective portions of the Option Shares being purchased by the
Underwriters to the Representatives at the offices of Dorsey & Whitney LLP as
set forth in Section 2(c) above, unless some other place is agreed upon, at
10:00 a.m., Minneapolis time, against payment of the purchase price at the
same place, on the date determined by the Representatives and of which the
Selling Shareholders have received notice as provided in Section 2(b), which
shall not be earlier than two nor later than three full business days after
the exercise of the option as set forth in Section 2(b), or at such other
time not later than ten full business days thereafter as may be agreed upon
by the Representatives and the Company, such time and date being herein
referred to as the "Second Closing Date."
(f) Certificates for the Shares to be delivered will be registered in
such names and issued in such denominations as the Underwriters shall request
at least two business days prior to the First Closing Date or the Second
Closing Date, as the case may be. The certificates will be made available to
the Underwriters in definitive form for the purpose of inspection and
packaging at least 24 hours prior to each respective closing date.
(g) Payment to the Company and the Selling Shareholders for the
Shares sold shall be made by wire transfer to the account designated by the
Company or by certified or official bank check or checks in Clearing House
funds, payable to the order, respectively, of the Company and the Selling
Shareholders.
(h) The Underwriters will make a public offering of the Shares
directly to the public (which may include selected dealers who are members in
good standing of the National Association of Securities Dealers, Inc.
("NASD") or foreign dealers not eligible for membership in the NASD but who
have agreed to abide by the interpretation of the NASD's Board of Governors
with respect to free-riding and withholding) as soon as the Underwriters deem
practicable after the Registration Statement becomes effective at the public
offering price set forth in Section 2(a) above, subject to the terms and
conditions of this Agreement and in accordance with the Prospectus;
concessions from the public offering price may be allowed to selected dealers
who are members of the NASD as the Underwriters determine, and the
Underwriters will furnish the Company with such information about the
distribution arrangements as may be necessary for inclusion in the
Registration Statement. It is understood that the public offering price and
concessions may vary after the public offering. The Underwriters shall offer
and sell the Shares only in jurisdictions in which the offering of Shares has
been duly registered or qualified, or is exempt from registration or
qualification, and shall take reasonable measures to effect compliance with
applicable state securities laws.
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<PAGE>
(i) It is understood that the Representatives, individually and not as
Representatives, may (but shall not be obligated to) make payment on behalf of
any Underwriter or Underwriters for the Shares to be purchased by such
Underwriter or Underwriters. No such payment by the Representatives shall
relieve such Underwriter or Underwriters from any of its or their other
obligations hereunder.
(j) On the First Closing Date, the Company shall issue and deliver to
you the Representatives' Warrant, against payment by the Representatives of
$50.00 as set forth in Section 5 of this Agreement.
3. COVENANTS OF THE COMPANY. The Company covenants and agrees with
the several Underwriters that:
(a) If the Company has elected to rely on Rule 430A under the Act,
the Company will prepare and file a Prospectus (or term sheet within the
meaning of Rule 434 under the Act) containing the information omitted
therefrom pursuant to Rule 430A under the Act with the Commission within the
time period required by, and otherwise in accordance with the provisions of,
Rules 424(b), 430A and 434, if applicable, under the Act; if the Company has
elected to rely upon Rule 462(b) under the Act to increase the size of the
offering registered under the Act, the Company will prepare and file a
registration statement with respect to such increase with the Commission
within the time period required by, and otherwise in accordance with the
provisions of, Rule 462(b) under the Act; the Company will prepare and file
with the Commission, promptly upon the request of the Representatives, any
amendments or supplements to the Registration Statement or Prospectus
(including any term sheet within the meaning of Rule 434 under the Act) that,
in the opinion of the Representatives, may be necessary or advisable in
connection with distribution of the Shares by Underwriters; and the Company
will not file any amendment or supplement to the Registration Statement or
Prospectus (including any term sheet within the meaning of Rule 434 under the
Act) to which the Representatives shall reasonably object by notice to the
Company after having been furnished with a copy a reasonable time prior to
the filing.
(b) The Company will advise the Representatives promptly of (i) any
request of the Commission for amendment of the Registration Statement or for
supplement to the Prospectus or for any additional information, (ii) the
issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement or the use of the Prospectus, (iii) the suspension
of the qualification of the Shares for offering or sale in any jurisdiction,
or (iv) the institution or threatening of any proceedings for that purpose,
and the Company will use its best efforts to prevent the issuance of any such
stop order preventing or suspending the use of the Prospectus or suspending
such qualification and to obtain as soon as possible the lifting thereof, if
issued.
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(c) The Company will endeavor to qualify the Shares for sale under
the securities laws of such jurisdictions as the Representatives may
reasonably have designated in writing and will, or will cause counsel for the
Underwriters to, make such applications, file such documents, and furnish
such information as may be reasonably requested by the Representatives,
provided that the Company shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in any
jurisdiction where it is not now so qualified or required to file such a
consent. The Company will, from time to time, prepare and file such
statements, reports and other documents as are or may be required to continue
such qualifications in effect for so long a period as the Representatives may
reasonably request for distribution of the Shares.
(d) The Company will furnish the Underwriters with as many copies of
any Preliminary Prospectus as the Representatives may reasonably request and,
during the period when delivery of a prospectus is required under the Act,
the Company will furnish the Underwriters with as many copies of the
Prospectus in final form, or as thereafter amended or supplemented, as the
Representatives may, from time to time, reasonably request. The Company will
deliver to the Representatives, at or before the First Closing Date, three
signed copies of the Registration Statement and all amendments thereto
including all exhibits filed therewith, and will deliver to the
Representatives such number of copies of the Registration Statement, without
exhibits, and of all amendments thereto, as the Representatives may
reasonably request.
(e) If, during the period in which a prospectus is required by law to
be delivered by an Underwriter or dealer, any event shall occur as a result
of which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in light of the
circumstances existing at the time the Prospectus is delivered to a
purchaser, not misleading, or if for any other reason it shall be necessary
at any time to amend or supplement the Prospectus to comply with any law, the
Company promptly will prepare and file with the Commission an appropriate
amendment to the Registration Statement or supplement to the Prospectus so
that the Prospectus as so amended or supplemented will not include an untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein in light of the circumstances in which
they are made, when it is so delivered, not misleading, or so that the
Prospectus will comply with law. In case any Underwriter is required to
deliver a prospectus in connection with sales of any Shares at any time nine
months or more after the effective date of the Registration Statement, upon
the request of the Representatives but at the expense of such Underwriter,
the Company will prepare and deliver to such Underwriter as many copies as the
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Representatives may request of an amended or supplemented Prospectus
complying with Section 10(a)(3) of the Act.
(f) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not later
than 15 months after the effective date of the Registration Statement, an
earnings statement (which need not be audited) in reasonable detail, covering
a period of at least 12 consecutive months beginning after the effective date
of the Registration Statement, which earnings statement shall satisfy the
requirements of Section 11(a) of the Act and Rule 158 thereunder, and the
Company will advise you in writing when such statement has been so made
available.
(g) The Company will, for a period of five years after the First
Closing Date, deliver to the Representatives copies of its annual report and
copies of all other documents, reports and information furnished by the
Company to its security holders or filed with any securities exchange
pursuant to the requirements of such exchange or with the Commission pursuant
to the Act or the Exchange Act.
(h) No offering, sale or other disposition of any Common Stock or
other capital stock of the Company, or warrants, options, convertible
securities or other rights to acquire such Common Stock or other capital
stock (other than pursuant to existing employee stock option plans,
outstanding options or warrants or on the conversion of convertible
securities outstanding on the date of this Agreement) will be made for a
period of 180 days after the date of this Agreement, directly or indirectly,
by the Company otherwise than hereunder or with the prior written consent of
Cruttenden.
(i) The Company will apply the net proceeds from the sale of the
Shares to be sold by it hereunder substantially in accordance with the
purposes set forth under "Use of Proceeds" in the Prospectus and will file
such reports with the Commission with respect to the sale of the Shares and
the application of the proceeds therefrom as may be required in accordance
with Rule 463 under the Act.
(j) The Company will use its best efforts to maintain the designation
of the Common Stock on the Nasdaq National Market.
(k) Subject to the provisions set forth below, the Company shall be
responsible for and pay all costs and expenses incident to the performance of
its obligations under this Agreement including, without limiting the
generality of the foregoing, (i) all costs and expenses in connection with
the preparation, printing and filing of the Registration Statement (including
financial statements and exhibits), Preliminary Prospectuses, the Prospectus
and any amendments thereof or supplements to any of the foregoing; (ii) the
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issuance and delivery of the Shares, including taxes, if any; (iii) the cost
of all certificates representing the Shares; (iv) the fees and expenses of
the Transfer Agent for the Shares; (v) the fees and disbursements of counsel
for the Company; (vi) all fees and other charges of the independent public
accountants of the Company; (vii) the cost of furnishing and delivering to
the Underwriters and dealers participating in the offering copies of the
Registration Statement (including appropriate exhibits), Preliminary
Prospectuses, the Prospectus and any amendments of, or supplements to, any of
the foregoing; (viii) the NASD filing fee; and (ix) all accountable fees and
expenses of counsel for the Company and counsel for the Representatives
incurred in qualifying the Shares for sale under the laws of such
jurisdictions upon which the Representatives and the Company may agree
(including filing fees). The Company shall grant to the Representatives a
non-accountable expense allowance equal to 2% of the gross proceeds of the
offering of the Shares to cover certain expenses of the Representatives,
including but not limited to the reasonable fees and expenses of the
Representatives' counsel, costs and expenses of conducting a due diligence
investigation of the Company and due diligence meetings, costs of travel in
connection with the selling effort and tombstone advertisements. The
Representatives acknowledge receipt of a $50,000 deposit against the
non-accountable expense allowance referred to in the preceding sentence,
which deposit shall be refundable to the extent the Representatives' actual
out-of-pocket expenses are less than $50,000. In the event this Agreement
is terminated pursuant to Section 8 below, the Company shall remain obligated
to pay the Representatives their actual accountable out-of-pocket expenses,
not to exceed $50,000, plus any fees and expenses described in (ix) above.
The Company shall not in any event be liable to any of the Underwriters for
the loss of anticipated profits from the transactions covered by this Agreement.
The provisions of this Section 3(k) are intended to allocate responsibility for
the expenses as between the Company and the Underwriters and shall not affect
any agreement between the Company and the Selling Shareholders for the sharing
of such costs and expenses.
(l) The Company will not take, directly or indirectly, any action
designed to or which might reasonably be expected to cause or result in, or
which has constituted, the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Shares, and
will not effect any sales of any security of the Company which are required
to be disclosed in response to Item 701 of Regulation S-K of the Commission
which have not been so disclosed in the Registration Statement.
4.CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS.
The respective obligations of the Underwriters to purchase and pay for
the Shares as provided herein shall be subject to the accuracy of the
representations and warranties of the Company and the Selling Shareholders,
in the case of the Firm Shares as of the date hereof and the First Closing
Date (as if made on and as of
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the First Closing Date), and in the case of the Option Shares, as of the date
hereof and the Second Closing Date (as if made on and as of the Second
Closing Date), to the performance by the Company and the Selling Shareholders
(in the case of the First Closing Date) of their obligations hereunder, and
to the satisfaction of the following additional conditions on or before the
First Closing Date in the case of the Firm Shares and on or before the Second
Closing Date in the case of the Option Shares:
(a) All filings required by Rules 424, 430A and 434 under the Act
shall have been timely made; no stop order suspending the effectiveness of
the Registration Statement, as amended from time to time, or any part thereof
shall have been issued and no proceedings for that purpose shall have been
initiated or threatened by the Commission; and all requests for additional
information on the part of the Commission shall have been complied with to
the reasonable satisfaction of the Representatives.
(b) The Representatives shall have received the opinion of Chernesky,
Heyman & Kress P.L.L., counsel for the Company, dated as of the First Closing
Date or the Second Closing Date, as the case may be, addressed to the
Underwriters and satisfactory in form and substance to the Representatives
and their counsel, substantially to the effect that:
(i) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Minnesota,
with corporate power and authority to own or lease its properties and conduct
its business as described in the Registration Statement and the Prospectus.
The Company is duly qualified and in good standing as a foreign corporation
in each jurisdiction where the conduct of its business makes such
qualification necessary and the failure to so qualify would have a material
adverse effect on the business, properties, condition (financial or
otherwise), results of operations, shareholders' equity or prospects of the
Company.
(ii) The Company has authorized capital stock as described in the
Prospectus. The outstanding shares of the Company's capital stock have been
duly authorized and validly issued and are fully paid and nonassessable. The
Shares to be issued and sold by the Company pursuant to this Agreement have
been duly authorized and, when issued and paid for as contemplated herein,
will be validly issued, fully paid and nonassessable. No preemptive rights
pursuant to corporate law or, to the knowledge of such counsel, other
preemptive or similar subscription rights of shareholders of the Company, or
of holders of warrants, options, convertible securities or other rights to
acquire shares of capital stock of the Company, exist with respect to any of
the Shares or the issue and sale thereof. To the knowledge of such counsel,
no rights to register outstanding shares of the Company's capital stock,
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or shares issuable upon the exercise of outstanding warrants, options,
convertible securities or other rights to acquire shares of such capital
stock, exist which have not been validly exercised or waived with respect to
the Registration Statement. The capital stock of the Company, including the
Shares, conforms in all material respects to the description thereof
contained in the Prospectus.
(iii) The Registration Statement has become effective under the Act
and, to the knowledge of such counsel, no stop order or proceedings with
respect thereto have been instituted or are pending or threatened by the
Commission.
(iv) The Registration Statement, the Prospectus and each amendment
or supplement thereto comply as to form in all material respects with the
requirements of the Act and the rules and regulations thereunder (except that
such counsel need express no opinion as to the financial statements, related
schedules or other financial or statistical data included therein or
incorporated therein by reference).
(v) To such counsel's knowledge, there are no statutes,
regulations or legal or governmental proceedings required to be described in
the Prospectus that are not described as required and no franchises, leases,
contracts, agreements or documents of a character required to be disclosed in
the Registration Statement or Prospectus or to be filed as exhibits to the
Registration Statement which are not disclosed or filed, as required.
(vi) The statements (A) in the Prospectus under the caption
"Description of Capital Stock," and (B) in the Registration Statement in Item
15, insofar as such statements constitute a summary of matters of law, are
accurate summaries and fairly present the information called for with respect
to such matters in all material respects.
(vii) The execution, delivery and performance of this Agreement and
the consummation of the transactions herein contemplated do not and will not
conflict with or result in a violation of or default under the Articles of
Incorporation or Bylaws of the Company, or (assuming compliance with all
applicable state securities and blue sky laws) under any statute, rule or
regulation of the United States or the State of Minnesota applicable to the
Company or any permit, order, judgment or decree known to such counsel, or
any indenture, mortgage, loan agreement or other material agreement,
instrument or obligation known to such counsel to which the Company is a
party or by which it or its material properties are bound.
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(viii) The Company has the corporate power and authority to enter
into this Agreement and to authorize, issue and sell the Shares as
contemplated hereby. This Agreement has been duly and validly authorized,
executed and delivered by the Company and constitutes a valid, legal and
binding obligation of the Company enforceable in accordance with its terms,
except as rights to indemnity hereunder may be limited by federal or state
securities laws and except as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting the rights
of creditors generally and subject to general principles of equity.
(ix) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body is necessary in connection with the execution, delivery and
performance of this Agreement and the consummation of the transactions herein
contemplated (other than as may be required by state securities and blue sky
laws, as to which such counsel need express no opinion) except such as have
been obtained or made, specifying the same.
(x) To such counsel's knowledge, there are no legal or
governmental proceedings, pending or threatened, before any court or
administrative body or regulatory agency to which the Company is a party or
to which any of the properties of the Company is subject except as have been
disclosed in writing to the Representatives.
(xi) The form of certificate for the Shares is in due and proper
form and complies with all applicable statutory requirements.
(xii) The Company has the corporate power and authority to issue the
Representatives' Warrant. The Representatives' Warrant has been duly
authorized, executed and delivered by the Company and constitutes the valid
and binding obligation of the Company enforceable in accordance with its
terms, except as enforceability thereof may be limited by bankruptcy,
insolvency, reorganization or similar laws affecting the rights of creditors
generally and subject to general principles of equity. The Warrant Shares
issuable upon exercise of the Representatives' Warrant have been duly
authorized and reserved for issuance upon exercise of the Representatives'
Warrant, and, upon exercise of the Representatives' Warrant and receipt by
the Company of the consideration for such shares in accordance with the terms
thereof, such Warrant Shares will be validly issued, fully paid and
nonassessable.
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(xiii) Based solely upon a review of 16 C.F.R. Section 435.1 et seq.
(1996) (the "Mail Order Rule"), the conduct of the Company's business as
described in the Prospectus does not violate the Mail Order Rule.
(xiv) To the best of such counsel's knowledge, the statements in
the Registration Statement and the Prospectus under the caption
"Business--Service Marks" are accurate and complete statements or summaries
of the matters therein set forth.
(xv) To the best of such counsel's knowledge, the Company owns or
is licensed to use all trade secrets, trademarks, service marks or other
proprietary information or know-how necessary to conduct the business now
being or proposed to be conducted by the Company as described in the
Prospectus (the "Proprietary Rights").
(xvi) To the best of such counsel's knowledge, there are no pending
legal proceedings relating to the Proprietary Rights, and no such proceedings
are threatened or contemplated.
(xvii) To such counsel's knowledge after due inquiry, the Company is
not infringing or otherwise violating, and the conduct of the business of the
Company as intended to be conducted as described in the Prospectus will not
infringe or otherwise violate, any patents, trade secrets, trademarks,
service marks, copyrights or other proprietary information or know-how of any
persons, and no person is infringing or otherwise violating any of the
Proprietary Rights in a way which could materially affect the ownership or
use thereof by the Company.
In rendering the opinions described above, counsel for the Company may
rely, as to matters of fact with respect to the Company, upon representations
of the Company contained in this Agreement and certificates of officers of
the Company provided that copies of such certificates are delivered to the
Representatives and as to matters governed by the laws of the State of
Minnesota, on opinions of local counsel reasonably satisfactory to the
Representatives.
In addition to the matters set forth above, each such opinion shall
also include a statement to the effect that, although such counsel has not
independently verified or checked the accuracy, completeness or fairness of
any of the statements contained in the Registration Statement or Prospectus,
(and accordingly does not assume any responsibility for the accuracy,
completeness or fairness of such statements), in connection with such
counsel's representation and inquiry of the Company in the preparation of the
Registration Statement and Prospectus, no facts came to the attention of such
counsel which caused it to conclude that, as of the time the Registration
Statement became effective and as of the First Closing Date or the Second
Closing Date, as the case may be, the Registration Statement or any further
amendment thereto (other than the financial statements, and other financial
or statistical data included therein or incorporated therein by reference, or
any information furnished by the Underwriters for use in the Registration
Statement, as to which such counsel need make no statement) contained or
contains an untrue statement of a material fact or omitted or omits to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading or that, as of the date of the Prospectus
or any amendment or supplement thereto and as of the First Closing Date or
the Second Closing Date, as the case may be, the Prospectus or any amendment
or supplement thereto (other than the financial statements,
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and other financial or statistical data included therein or
incorporated therein by reference, or any information furnished by the
Underwriters for use in the Registration Statement, as to which such counsel
need make no statement) contained or contains an untrue statement of a
material fact or omitted or omits to state a material fact necessary to make
the statements therein, in light of the circumstances in which they were
made, not misleading.
(c) The Representatives shall have received the opinion of counsel
for each of the Selling Shareholders, which counsel shall be reasonably
acceptable to the Representatives, dated the First Closing Date or the Second
Closing Date, as the case may be, addressed to the Underwriters and
satisfactory in form and substance to the Representatives and their counsel,
substantially to the effect that:
(i) Such Selling Shareholder has the power and authority to enter
into this Agreement, the Custody Agreement and the Power of Attorney and to
perform and discharge such Selling Shareholder's obligations thereunder and
hereunder; and this Agreement, the Custody Agreement and the Power of
Attorney have been duly and validly authorized, executed and delivered by (or
by the Attorneys-in-Fact, or either of them, on behalf of) such Selling
Shareholder and are the valid and binding agreements of the Selling
Shareholder, enforceable in accordance with their respective terms (except as
rights to indemnity hereunder or thereunder may be limited by federal or
state securities laws and except as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally and subject to general principles of equity).
(ii) The sale of the Shares to be sold by such Selling Shareholder
hereunder and the compliance by such Selling Shareholder with all of the
provisions of this Agreement, the Power of Attorney and the Custody
Agreement, and the consummation of the transactions herein and therein
contemplated, will not conflict with or result in a breach or violation of
any terms or provisions of, or constitute a default under, any statute, any
indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument known to such counsel to which such
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<PAGE>
Selling Shareholder is a party or by which such Selling Shareholder is bound
or to which any of the property or assets of such Selling Shareholder is
subject, nor will such action result in any violation of any order, rule or
regulation known to such counsel of any court or governmental agency or body
having jurisdiction over such Selling Shareholder or the property of such
Selling Shareholder.
(iii) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the
transactions contemplated by this Agreement in connection with the Shares to
be sold by such Selling Shareholder hereunder, except such consents,
approvals, authorizations or orders as have been validly obtained and are in
full force and effect, such as have been obtained under the Act and such as
may be required under the state securities or blue sky laws in connection
with the purchase and distribution of such Shares by the Underwriters.
(iv) Such Selling Shareholder has full power and authority to sell
and deliver the Shares to be sold by such Selling Shareholder hereunder.
(v) Delivery of the certificates for the Shares to be sold by such
Selling Shareholder pursuant to this Agreement, upon payment therefor by the
Underwriters, will pass good and valid title to such Shares to the
Underwriters, and the Underwriters will acquire all the rights of such
Selling Shareholder in the Shares (assuming the Underwriters have no
knowledge of an adverse claim), free and clear of any claims, liens,
encumbrances, security interests or other adverse claims.
In rendering the opinions described above, counsel for each of the
Selling Shareholders may rely, as to matters of fact with respect to such
Selling Shareholder, upon the representations of such Selling Shareholder
contained in this Agreement, the Power of Attorney and Custody Agreement.
(d) The Representatives shall have received from Dorsey & Whitney
LLP, counsel for the Underwriters, an opinion dated the First Closing Date or
the Second Closing Date, as the case may be, with respect to such matters as
the Representatives may reasonably request, and such counsel shall have
received such documents and information as they may reasonably request to
enable them to pass upon such matters.
(e) The Representatives shall have received on each of the date
hereof, the First Closing Date and the Second Closing Date, as the case may
be, a signed letter, dated as of the date hereof, the First Closing Date or
the Second Closing Date, as the case may be, in form and substance
satisfactory to the
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Representatives, from Grant Thornton LLP, to the effect that they are
independent public accountants with respect to the Company within the meaning
of the Act and the related rules and regulations, stating that in their
opinion the financial statements and schedules examined by them and included
in the Registration Statement comply in form in all material respects with
the applicable accounting requirements of the Act and the related rules and
regulations, and containing such other statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters with
respect to the financial statements and certain financial information
contained in the Registration Statement and the Prospectus.
(f) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, and except as
contemplated or referred to in the Prospectus, the Company shall not have
incurred any direct or contingent liabilities or obligations material to the
Company, or entered into any material transactions, except liabilities,
obligations or transactions in the ordinary course of business, or declared
or paid any dividends or made any distribution of any kind with respect to
its capital stock; and there shall not have been any change in the capital
stock (other than a change in the number of outstanding shares of Common
Stock due to the exercise of options or warrants described in the
Registration Statement and the Prospectus), or any change in the short-term
debt or long-term debt (including capitalized lease obligations) of the
Company, or any issuance of options, warrants, convertible securities or
other rights to purchase the capital stock of the Company or any change or
any development involving a prospective change in or affecting the general
affairs, management, financial position, shareholders' equity or results of
operations of the Company, otherwise than as set forth or contemplated in the
Prospectus, the effect of which, in the judgment of the Representatives makes
it impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares being delivered on the terms and in the manner
contemplated in the Prospectus.
(g) The Representatives shall have received from the Company a
certificate, dated as of the First Closing Date or Second Closing Date (as
the case may be), of the chief executive officer, the chief operating officer
and the chief financial officer of the Company to the effect that:
(i) The representations and warranties of the Company in this
Agreement are true and correct as if made on and as of each closing date.
The Company has complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at, or prior to, such
date.
(ii) No stop order suspending the effectiveness of the Registration
Statement has been issued, and no proceeding for that
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purpose has been instituted or is pending or, to the knowledge of such
officers, is contemplated under the Act.
(iii) Neither the Registration Statement nor the Prospectus nor
any amendment thereof or supplement thereto included any untrue statement of
a material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, and, since the
effective date of the Registration Statement, there has occurred no event
required to be set forth in an amended or supplemented prospectus which has
not been so set forth; provided, however, that such certificate does not
require any representation concerning statements in, or omissions from, the
Registration Statement or Prospectus or any amendment thereof or supplement
thereto, which are based solely upon and conform to written information
furnished to the Company by any of the Selling Shareholders or any of the
Underwriters specifically for use in the preparation of the Registration
Statement or the Prospectus or any such amendment or supplement.
(iv) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, and except as
contemplated or referred to in the Prospectus, the Company has not incurred
any direct or contingent liabilities or obligations material to the Company,
or entered into any material transactions, except liabilities, obligations or
transactions in the ordinary course of business, or declared or paid any
dividend or made any distribution of any kind with respect to its capital
stock, and there has not been any change in the capital stock (other than a
change in the number of outstanding shares of Common Stock due to the
exercise of options or warrants described in the Registration Statement and
the Prospectus), short-term debt, or long-term debt (including capitalized
lease obligations) of the Company, or any issuance of options, warrants,
convertible securities or other rights to purchase the capital stock of the
Company or any material adverse change or any development involving a
prospective material adverse change (whether or not arising in the ordinary
course of business) in or affecting the general affairs, condition (financial
or otherwise), business, key personnel, property, prospects, net worth or
results of operations of the Company.
(v) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, the Company has not
sustained any material loss of, or damage to, its business or properties,
whether or not covered by insurance.
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(vi) Except as is otherwise expressly stated in the Registration
Statement and Prospectus there are no material actions, suits or proceedings
pending before any court or governmental agency, authority or body, or, to
such officers' knowledge, threatened, to which the Company is a party or of
which the business or property of the Company is the subject.
(h) The Representatives shall have received from the Secretary of the
Company a certificate of incumbency, dated as of the First Closing Date or
Second Closing Date (as the case may be), certifying the names, titles and
signatures of the officers authorized to execute, deliver and perform this
Agreement. Attached to such certificate shall be a copy of the Bylaws of the
Company and the resolutions of the Board of Directors of the Company
authorizing the execution, delivery and performance of this Agreement. Such
certificate shall also certify that such resolutions, the Articles of
Incorporation of the Company and the Bylaws of the Company have been validly
adopted and have not been amended or modified, except as described in the
Prospectus.
(i) The Representatives shall have received a written agreement from
each of the officers, directors and shareholders named in Schedule III
hereto, that (A) no offer, sale, contract to sell, other disposition of any
Common Stock of the Company will be made for a period of 180 days after the
effective date of the Registration Statement (the "Lock-Up Period"), directly
or indirectly, by such holder otherwise than with the prior written consent
of Kinnard, which right to consent has been assigned to Cruttenden, and
(B) for a period of 90 days following the Lock-Up Period, any shares of Common
Stock sold by such officer, director or shareholder shall be sold through the
Representatives.
(j) The Shares shall have been approved for listing on the Nasdaq
National Market.
(k) The Company and the Selling Shareholders shall have furnished to
the Underwriters, dated as of the date of each Closing Date, such further
certificates and documents as the Representatives shall have reasonably
required.
(l) All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably
satisfactory to the Representatives and their legal counsel. All statements
contained in any certificate, letter or other document delivered pursuant
hereto by, or on behalf of, the Company shall be deemed to constitute
representations and warranties of the Company.
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(m) The Representatives may waive in writing the performance of any
one or more of the conditions specified in this Section 4 or extend the time
for their performance.
5. REPRESENTATIVES' WARRANT.
On the First Closing Date, the Company shall sell to you, in
consideration of a payment by the Representatives to the Company of Fifty
Dollars ($50.00), the Representatives' Warrant, which shall first become
exercisable one year after the Effective Date and shall remain exercisable
for a period of four years thereafter. The Representatives' Warrant shall be
subject to certain transfer restrictions and shall be in substantially the
form filed as an exhibit to the Registration Statement and attached as
Appendix A hereto.
6. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter, the Selling Shareholders and each person, if any, who controls
any Underwriter within the meaning of Section 15 of the Act against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter, any of the Selling Shareholders or each such controlling person
may become subject, under the Act, the Exchange Act, the common law or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of, or are based upon: (i) any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement or any amendment thereof, or the omission or alleged omission to
state in the Registration Statement or any amendment thereof a material fact
required to be stated therein or necessary to make the statements therein not
misleading; (ii) any untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading; or (iii) any untrue statement or alleged untrue
statement of a material fact contained in any application or other statement
executed by the Company or based upon written information furnished by the
Company and filed in any jurisdiction in order to qualify the Shares under,
or exempt the Shares or the sale thereof from qualification under, the
securities laws of such jurisdiction, or the omission or alleged omission to
state in such application or statement a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; and will reimburse
each Underwriter, each such Selling Shareholder and each such controlling
person for any legal or other expenses reasonably incurred by such
Underwriter, Selling Shareholder or controlling person (subject to the
limitations of Section 6(d) below) in connection with investigating or
defending against any such loss,
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claim, damage, liability or action; provided, however, that the Company will
not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of, or is based upon, an untrue statement, or
alleged untrue statement, omission or alleged omission, made in reliance upon
and in conformity with information furnished to the Company by, or on behalf
of, any Underwriter or any Selling Shareholder in writing specifically for
use in the preparation of the Registration Statement or any such post-
effective amendment thereof, any such Preliminary Prospectus or the
Prospectus or any such amendment thereof or supplement thereto. This
indemnity agreement is in addition to any liability which the Company may
otherwise have.
(b) Each Underwriter severally, but not jointly, agrees to indemnify
and hold harmless the Company, each of the Company's directors, each of the
Company's officers who has signed the Registration Statement, the Selling
Shareholders and each person who controls the Company within the meaning of
Section 15 of the Act against any losses, claims, damages or liabilities,
joint or several, to which the Company or any such Selling Shareholder,
director, officer, or controlling person may become subject, under the Act,
the Exchange Act, the common law or otherwise, insofar as such losses,
claims, damages, or liabilities (or actions in respect thereof) arise out of,
or are based upon: (i) any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or any amendment
thereof, or the omission or alleged omission to state in the Registration
Statement or any amendment thereof, a material fact required to be stated
therein or necessary to make the statements therein not misleading; (ii) any
untrue statement or alleged untrue statement of a material fact contained in
any Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto, or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading; or (iii) any untrue statement or alleged untrue statement of a
material fact contained in any application or other statement executed by the
Company or by any Underwriter or based upon written information furnished by
the Company or the Underwriters and filed in any jurisdiction in order to
qualify the Shares under, or exempt the Shares or the sale thereof from
qualification under, the securities laws of such jurisdiction, or the
omission or alleged omission to state in such application or statement a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; in each of the above cases to the extent, but only the
extent, that such untrue statement, alleged untrue statement, omission or
alleged omission, was made in reliance upon and in conformity with
information furnished to the Company by, or on behalf of, any Underwriter in
writing specifically for use in the preparation of the Registration Statement
or any such post-effective amendment thereof, any such Preliminary
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Prospectus or the Prospectus or any such amendment thereof or supplement
thereto, or in any application or other statement executed by the Company or
by any Underwriter and filed in any jurisdiction; and each Underwriter will
reimburse any legal or other expenses reasonably incurred by the Company or
any such Selling Shareholder, director, officer, or controlling person in
connection with investigating or defending against any such loss, claim,
damage, liability or action. This indemnity agreement is in addition to any
liability which the Underwriters may otherwise have.
(c) Each Selling Shareholder severally, but not jointly, agrees to
indemnify and hold harmless the Company, each of the Company's directors,
each of the Company's officers who has signed the Registration Statement,
each person who controls the Company within the meaning of Section 15 of the
Act, each Underwriter and each person who controls an Underwriter against any
losses, claims, damages or liabilities to which the Company, any Underwriter,
or any such director, officer, or controlling person may become subject,
under the Act, the Exchange Act, the common law, or otherwise, insofar as
such losses, claims, damages, or liabilities (or actions in respect thereof)
arise out of, or are based upon, (i) any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or any
amendment thereof, or the omission or alleged omission to state in the
Registration Statement or any amendment thereof a material fact required to
be stated therein or necessary to make the statements therein not misleading;
(ii) any untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Prospectus or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading; in each of the above cases to the extent, but only the
extent, that such untrue statement, alleged untrue statement, omission or
alleged omission was made in reliance upon and in conformity with information
furnished to the Company by, or on behalf of, the Selling Shareholder in
writing specifically for use in the preparation of the Registration
Statement, any such Preliminary Prospectus or the Prospectus or any such
amendment or supplement thereto, and the Selling Shareholder will reimburse
any legal or other expenses reasonably incurred by the Company, any
Underwriter or any such director, officer or controlling person in connection
with investigating or defending against any such loss, claim, damage,
liability or action. In no event, however, shall the liability of the
Selling Shareholder for indemnification under this Section 6(c) exceed the
lesser of (i) that proportion of the total of such losses, claims, damages or
liabilities indemnified against equal to the proportion of the total Shares
sold hereunder that are being sold by such Selling Shareholder, or (ii) the
proceeds received by such Selling Shareholder for the Shares sold by it to
the Underwriters. This indemnity agreement is in addition to any liability
which the Selling Shareholder may otherwise have. Each Selling Shareholder's
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liability for indemnification under this Section 6(c), insofar as it arises
(i) from any untrue statement or alleged untrue statement of a material fact
pertaining to the Selling Shareholder contained in a post-effective amendment
to the Registration Statement but not in the Registration Statement, or (ii)
the omission or alleged omission to state a material fact pertaining to the
Selling Shareholder in a post-effective amendment which fact was stated in
the Registration Statement, shall require the indemnified party or parties to
demonstrate that prior to the filing of such post-effective amendment the
indemnifying Selling Shareholder shall have been furnished a copy of such
post-effective amendment and given an opportunity to comment thereon.
(d) Promptly after receipt by an indemnified party under this Section
6 of notice of the commencement of any action, such indemnified party will,
if a claim in respect thereof is to be made against any indemnifying party
under this Section 6, notify in writing the indemnifying party of the
commencement thereof. The omission to so notify the indemnifying party will
not relieve it from any liability under this Section 6 as to the particular
item for which indemnification is then being sought, unless such omission so
to notify materially prejudices the indemnifying party's ability to defend
such action. In case any such action is brought against any indemnified
party and the indemnified party notifies an indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof with
counsel who shall be reasonably satisfactory to such indemnified party; and
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Section 6 for any legal or other
expenses subsequently incurred by such indemnified party in connection with
the defense thereof other than reasonable costs of investigation; provided,
however, that if, in the reasonable judgment of the indemnified party or
parties, it is advisable for such party or parties and any controlling
persons to be represented by separate counsel, any indemnified party shall
have the right to employ separate counsel to represent it and other parties
and their controlling persons who may be subject to liability arising out of
any claim in respect of which indemnity may be sought by any party hereunder,
in which event the fees and expenses of such separate counsel shall be borne
by the indemnifying party. In such event, the indemnifying party will not be
obligated to pay the fees and expenses of more than one counsel for the
indemnified parties with respect to such claim. Any such indemnifying party
shall not be liable to any such indemnified party on account of any
settlement of any claim or action effected without the prior written consent
of such indemnifying party.
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7. CONTRIBUTION.
(a) If the indemnification provided for in Section 6 is unavailable
under applicable law to any indemnified party in respect of any losses,
claims, damages or liabilities referred to therein, then each indemnifying
party, in lieu of indemnifying such indemnified party, shall contribute to
the amount paid or payable by such indemnified party as a result of such
losses, claims, damages or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company, the
Selling Shareholders and the Underwriters from the offering of the Shares or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault
of the parties in connection with the statements or omissions which resulted
in such losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The Company, the Selling Shareholders and the
Underwriters agree that contribution determined by per capita allocation
(even if the Underwriters were considered a single person) would not be
equitable. The respective relative benefits received by the Company and the
Selling Shareholders on the one hand, and the Underwriters on the other hand,
shall be deemed to be in the same proportion as the total net proceeds from
the offering of the Shares (before deducting expenses) received by the
Company and the Selling Shareholders bears to the total underwriting discount
received by the Underwriters, in each case as set forth in the Prospectus.
The relative fault of the parties shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the parties and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The amount paid or payable by a party as a result of
the losses, claims, damages and liabilities referred to above shall be deemed
to include any legal or other fees or expenses reasonably incurred by such
party in connection with investigating or defending any action or claim.
Notwithstanding the provisions of this Section 7, (i) no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of any untrue or
alleged untrue statement or omission or alleged omission in the Registration
Statement, any Preliminary Prospectus, the Prospectus or any amendment or
supplement thereto; and (ii) no Selling Shareholder shall be required to
contribute any amount in excess of the proceeds such Selling Shareholder has
received for the Shares sold by such Selling Shareholder to the Underwriters.
The Underwriters' obligation to contribute pursuant to this Section 7 are
several and not joint in proportion to their respective Underwriting
Obligations. No person guilty of fraudulent misrepresentation (within the
meaning of Section
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11(f) of the Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. For purposes of this
Section 7, each person who controls an Underwriter within the meaning of the
Act or the Exchange Act shall have the same rights to contribution as such
Underwriter, each person who controls the Company within the meaning of the
Act or the Exchange Act shall have the same rights to contribution as the
Company and each officer of the Company who shall have signed the
Registration Statement and each director of the Company shall have the same
rights to contribution as the Company.
(b) Promptly after receipt by a party to this Agreement of notice of
the commencement of any action, suit, or proceeding, such person will, if a
claim for contribution in respect thereof is to be made against another party
(the "Contributing Party"), notify the Contributing Party of the commencement
thereof, but the omission so to notify the Contributing Party will not
relieve the Contributing Party from any liability which it may have to any
party other than under this Section 7, unless such omission so to notify
materially prejudices the Contributing Party's ability to defend such action.
Any notice given pursuant to Section 6 hereof shall be deemed to be like
notice hereunder. In case any such action, suit or proceeding is brought
against any party, and such person notifies a Contributing Party of the
commencement thereof, the Contributing Party will be entitled to participate
therein with the notifying party and any other Contributing Party similarly
notified.
8. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION.
(a) This Agreement shall become effective the later of (i) the date
and time that this Agreement is executed and delivered by the parties hereto
and (ii) at 10:00 a.m., Minneapolis time, on the first full business day
following the Effective Date, or at such earlier time after the Effective
Date as the Representatives in their discretion shall first release the
Shares for offering to the public. For purposes of this Section 8, the
Shares shall be deemed to have been released to the public upon release by
the Representatives of the publication of a newspaper advertisement relating
to the Shares or upon release of a telegram or a letter offering the Shares
for sale to securities dealers, whichever shall first occur.
(b) The Representatives shall have the right to terminate this
Agreement by giving notice to the Company as hereinafter specified at any
time prior to the First Closing Date, and the option referred to in Section
2(c), if exercised, may be canceled at any time by the Representatives by
giving such notice to the Company at any time prior to the Second Closing
Date, if (i) the Company shall have failed, refused or been unable, at or
prior to the First Closing Date, to perform any material agreement on its
part to be performed hereunder as of such date; (ii) any other condition of
the Underwriters'
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obligations hereunder is not fulfilled; (iii) trading in securities generally
on the New York Stock Exchange, American Stock Exchange or the Nasdaq Stock
Market shall have been suspended, or minimum or maximum prices for trading
shall have been required or established by the Commission or by any such
exchange or the Nasdaq Stock Market; (iv) a banking moratorium shall have
been declared by federal, New York or Minnesota authorities; (v) there shall
have been such a material adverse change in general economic, monetary,
political or financial conditions, or the effect of international conditions
on the financial markets in the United States shall be such as, in the
reasonable judgment of the Representatives, makes it impractical or
inadvisable to proceed with the completion of the sale of and payment for the
Shares; (vi) there shall have been the enactment, publication, decree or
other promulgation of any federal or state statute, regulation, rule or order
of any court or other governmental authority, which in the reasonable
judgment of the Representatives materially and adversely affects or will
materially and adversely affect the business or operations of the Company; or
(vii) there shall be an outbreak of major hostilities (or an escalation
thereof) in which the United States is involved or a formal declaration of
war by the United States of America shall have occurred or any other
substantial national or international calamity or any other event or
occurrence of a similar character shall have occurred since the execution of
this Agreement that, in the reasonable judgment of the Representatives, makes
it impractical or inadvisable to proceed with the completion of the sale of
and payment for the Shares. Any such termination shall be without liability
of any party to any other party, except as provided in Sections 6 and 7
hereof; provided, however, that the Company shall remain obligated to pay
costs and expenses to the extent provided in Section 3(k) hereof.
(c) If the Representatives elect to prevent this Agreement from
becoming effective or to terminate this Agreement as provided in this Section
8, they shall notify the Company and the Selling Shareholders by telegram or
telephone, confirmed by letter sent to the address(es) specified in Section
11 hereof. If the Company shall elect to prevent this Agreement from
becoming effective, it shall notify the Representatives promptly by telegram
or telephone, confirmed by letter sent to the address specified in Section 11
hereof.
(d) If the Company shall fail at the First Closing Date to sell and
deliver the number of Shares which it is obligated to sell hereunder, then
this Agreement shall terminate without any liability on the part of any
Underwriter. No action taken pursuant to this Section 8(d) shall relieve the
Company from liability, if any, in respect of such default.
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9. DEFAULT OF UNDERWRITER.
If on the First Closing Date or the Second Closing Date, as the case
may be, any Underwriter shall fail to purchase and pay for the portion of the
Shares which such Underwriter has agreed to purchase and pay for on such date
(otherwise than by reason of any default on the part of the Company), you, as
Representatives of the Underwriters, shall use your best efforts to procure
within 36 hours thereafter one or more of the other Underwriters, or any
others, to purchase from the Company such amounts as may be agreed upon, and
upon the terms set forth herein, of the Firm Shares or Option Shares, as the
case may be, which the defaulting Underwriter or Underwriters failed to
purchase. If during such 36 hours you, as Representatives, shall not have
procured such other Underwriters, or any others, to purchase the Firm Shares
or Option Shares, as the case may be, agreed to be purchased by the
defaulting Underwriter or Underwriters, then (A) if the aggregate number of
Shares with respect to which such default shall occur does not exceed 10% of
the Firm Shares or Option Shares, as the case may be, covered hereby, the
other Underwriters shall be obligated, severally, in proportion to the
respective numbers of Firm Shares or Option Shares, as the case may be, which
they are obligated to purchase hereunder, to purchase the Firm Shares or
Option Shares, as the case may be, which such defaulting Underwriter or
Underwriters failed to purchase or (B) if the aggregate number of shares of
Firm Shares or Option Shares, as the case may be, with respect to which such
default shall occur exceeds 10% of the Firm Shares or Option Shares, as the
case may be, covered hereby, the Company or you as the Representatives of the
Underwriters will have the right, by written notice given within the next
36-hour period to the parties to this Agreement, to terminate this Agreement
without liability on the part of the non-defaulting Underwriters or of the
Company or the Selling Shareholders except for expenses to be borne by the
Company and the Underwriters as provided in Section 3(k) hereof and the
indemnity and contribution agreements in Sections 6 and 7 hereof. In the
event of a default by any Underwriter or Underwriters as set forth in this
Section 9, the First Closing Date or Second Closing Date, as the case may be,
may be postponed for such period, not exceeding seven days, as you, as
Representatives, may determine in order that the required changes, not
including a reduction in the number of Firm Shares, in the Registration
Statement or in the Prospectus or in any other documents or arrangements may
be effected. Any action taken under this Section 9 shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
10. SURVIVAL OF INDEMNITIES, CONTRIBUTION AGREEMENTS, WARRANTIES AND
REPRESENTATIONS.
The respective indemnity and contribution agreements of the Company and
the Underwriters contained in Sections 6 and 7, respectively, the
representations and warranties of the Company and the Selling Shareholders
set forth in Section 1 hereof, and the covenants of the Company set forth in
Section 3 hereof, respectively, shall remain operative and in full force and
effect, regardless of
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any investigation made by, or on behalf of, the Underwriters, the Selling
Shareholders, the Company, any of its officers and directors, or any
controlling person referred to in Sections 6 and 7, and shall survive the
delivery of and payment for the Shares. The aforesaid indemnity and
contribution agreements shall also survive any termination or cancellation of
this Agreement. Any successor of any party or of any such controlling
person, or any legal representatives of such controlling person, as the case
may be, shall be entitled to the benefit of the respective indemnity and
contribution agreements.
11. NOTICES.
All notices or communications hereunder, except as herein otherwise
specifically provided, shall be in writing and, if sent to the
Representatives or any of the Underwriters, shall be mailed, delivered, or
telecopied and confirmed, to Cruttenden Roth Incorporated, 1050 17th Street,
Suite 1900, Denver, Colorado 80265, Attention: Joseph A. Radecki, with a copy
to Amy E. Ayotte, Esq., Dorsey & Whitney LLP, 220 South Sixth Street,
Minneapolis, Minnesota 55402; if sent to the Company or the Selling
Shareholders, shall be mailed, delivered, or telecopied and confirmed, to The
Sportsman's Guide, Inc., 411 Farwell Avenue, South St. Paul, Minnesota 55075,
Attention: Gary Olen, with a copy to Steven R. Watts, Esq., Chernesky, Heyman
& Kress P.L.L., 1100 Courthouse Plaza S.W., P.O. Box 3808, Dayton, Ohio
45401.
12. INFORMATION FURNISHED BY THE UNDERWRITERS AND THE SELLING
SHAREHOLDERS.
The statements (i) set forth in the last paragraph on the front cover
page, (ii) relating to the stabilization activities of the Underwriters and
(iii) the list of Underwriters following the first paragraph under the
caption "Underwriting," the third paragraph under the caption "Underwriting"
and the eighth paragraph under the caption "Underwriting" in any Preliminary
Prospectus and in the Prospectus constitute the only information furnished
by, or on behalf of, the Underwriters in writing specifically for use in the
preparation of the Registration Statement or any post-effective amendment
thereof, any Preliminary Prospectus or the Prospectus or any amendment
thereof or supplement thereto, or in any application or other statement
executed by the Company or by any Underwriter and filed in any jurisdiction
as referred to in Section 6 hereof. The statements set forth with respect to
the Selling Shareholders in "Principal and Selling Shareholders" are the only
information furnished in writing by or on behalf of the Selling Shareholders,
specifically for use with reference to such Selling Shareholders in any
Preliminary Prospectus and in the Prospectus.
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13. PARTIES.
This Agreement shall inure to the benefit of and be binding upon the
Underwriters, the Selling Shareholders and the Company, their respective
successors and assigns and the officers, directors and controlling persons
referred to in Sections 6 and 7. Nothing expressed in this Agreement is
intended or shall be construed to give any person or corporation, other than
the parties hereto, their respective successors and assigns and the
controlling persons, officers and directors referred to in Sections 6 and 7
any legal or equitable right, remedy or claim under, or in respect of, this
Agreement or any provision herein contained, this Agreement and all
conditions and provisions hereof being intended to be and being for the sole
and exclusive benefit of the parties hereto and their respective executors,
administrators, successors, assigns and such controlling persons, officers
and directors, and for the benefit of no other person or corporation. No
purchaser of any Shares from the Underwriters shall be construed a successor
or assign merely by reason of such purchase.
14. GOVERNING LAW.
This Agreement shall be construed and enforced in accordance with the
laws of the State of Minnesota without regard to its conflict of law
provisions.
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If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed counterpart of this
Agreement, whereupon it will become a binding agreement between the Company,
the Selling Shareholders and each of the Underwriters in accordance with its
terms.
Very truly yours,
THE SPORTSMAN'S GUIDE, INC.
__________________________
By:
Its:
SELLING SHAREHOLDERS:
Vincent W. Shiel
Leonard M. Paletz
Mark F. Kroger
Ralph E. Heyman, individually and as
trustee of various trusts for the
benefit of Dr. and Mrs. Shiel and
their children and grandchildren
William T. Sena, as trustee of various
trusts for the benefit of Dr. and
Mrs. Shiel and their children
Stuart A. Shiel
Deryl L. Patterson
Frederick J. Kroger
Susan M. Mills Charitable Remainder
Unitrust
Frederic H. Mayerson
Philip H. Steiner
Richard H. Steiner
By________________________
Attorney-In-Fact
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The foregoing Underwriting Agreement is
hereby confirmed and accepted by us for
ourselves and as Representatives of the
Underwriters referred to in the foregoing
Agreement as of the date first above written.
CRUTTENDEN ROTH INCORPORATED
JOHN G. KINNARD AND COMPANY,
INCORPORATED
By: Cruttenden Roth Incorporated
__________________________
By:
Its:
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SCHEDULE I
NAME OF UNDERWRITER NUMBER OF FIRM SHARES
Cruttenden Roth Incorporated
John G. Kinnard and
Company, Incorporated
Total 2,000,000
---------
---------
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SCHEDULE II
Schedule of Selling Shareholders
NUMBER OF NUMBER OF
NAME OF SELLING SHAREHOLDER FIRM SHARES OPTION SHARES
Vincent W. Shiel 109,413 82,059
Leonard M. Paletz 45,822 34,366
Mark F. Kroger 20,424 15,318
Ralph E. Heyman, individually and as
trustee of various trusts for the
benefit of Dr. and Mrs. Shiel and
their children and grandchildren 87,056 65,293
William T. Sena, as trustee of various
trusts for the benefit of Dr. and
Mrs. Shiel and their children 19,258 14,440
Stuart A. Shiel 35,741 26,806
Deryl L. Patterson 3,828 2,873
Frederick J. Kroger 20,424 15,318
Susan M. Mills Charitable Remainder
Unitrust 37,611 28,208
Frederic H. Mayerson 10,211 7,659
Philip H. Steiner 5,106 3,830
Richard H. Steiner 5,106 3,830
Total 400,000 300,000
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SCHEDULE III
Schedule of Shareholders Required to Execute Lock-up Agreements
NUMBER OF
NAME OF SHAREHOLDER OUTSTANDING SHARES*
Vincent W. Shiel, Trustee 425,003
Helen M. Shiel, Trustee 75,001
Gary Olen 83,183
Gregory R. Binkley 10,000
Charles B. Lingen 0
William G. Luth 0
Leonard M. Paletz 168,578
Mark F. Kroger 72,911
William T. Sena (Individually) 0
William T. Sena, Trustee 68,742
Ralph E. Heyman (Individually) 2,000
Ralph E. Heyman, Trustee 310,780
Stuart A. Shiel 127,593
Deryl L. Patterson 13,671
Frederick J. Kroger 93,335
Susan M. Mills (Individually) 106,059
Susan M. Mills Charitable Remainder Unitrust 28,208
Frederic H. Mayerson 36,454
Philip H. Steiner 18,229
Richard H. Steiner 18,229
TOTAL* 1,548,563
__________
* Does not include the 400,000 shares to be sold in the offering by the
Selling Shareholders or shares issuable upon the exercise of outstanding
options and warrants.
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APPENDIX A
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS. NO SALE, OFFER TO SELL OR TRANSFER OF THESE SECURITIES MAY
BE MADE WITHOUT SUCH REGISTRATION OR AN EXEMPTION THEREFROM.
WARRANT
TO PURCHASE 100,000 SHARES OF
COMMON STOCK OF
THE SPORTSMAN'S GUIDE, INC.
THIS CERTIFIES THAT, for good and valuable consideration received,
Cruttenden Roth Incorporated and John G. Kinnard and Company, Incorporated (the
"Representatives"), or their registered assigns, are entitled to subscribe
for and purchase from The Sportsman's Guide, Inc., a Minnesota corporation
(the "Company"), at any time after February __, 1999 (one year after
Effective Date as defined in the Underwriting Agreement), up to and including
February __, 2003, 100,000 fully paid and nonassessable shares of the Common
Stock of the Company at the price of $___ per share (the "Warrant Exercise
Price"), subject to the antidilution provisions, and to the provisions of
Section 10, of this Warrant. Reference is made to this Warrant in the
Underwriting Agreement dated February __, 1998, by and between the Company,
the Representatives and certain shareholders of the Company. The shares
which may be acquired upon exercise of this Warrant are referred to herein as
the "Warrant Shares." As used herein, the term "Holder" means the
Representatives, any party who acquires all or a part of this Warrant as a
registered transferee of the Representatives, or any record holder or holders
of the Warrant Shares issued upon exercise, whether in whole or in part, of
the Warrant; and the term "Common Stock" means and includes the Company's
presently authorized common stock, $.01 par value, and shall also include any
capital stock of any class of the Company hereafter authorized which shall
not be limited to a fixed sum or percentage in respect of the rights of the
holders thereof to participate in dividends or in the distribution of assets
upon the voluntary or involuntary liquidation, dissolution, or winding up of
the Company.
This Warrant is subject to the following provisions, terms and conditions:
1. EXERCISE; TRANSFERABILITY.
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(a) The rights represented by this Warrant may be exercised by the
Holder hereof, in whole or in part (but not as to a fractional share of
Common Stock), by written notice of exercise (in the form attached hereto)
delivered to the Company at the principal office of the Company prior to the
expiration of this Warrant and accompanied or preceded by the surrender of
this Warrant along with a check in payment of the Warrant Exercise Price for
such shares or without payment of cash pursuant to Section 10 hereof.
(b) This Warrant may not be sold, assigned, hypothecated, or
otherwise transferred, other than by will or pursuant to the operation of
law, except to a person who is an officer of the Representatives. Further,
this Warrant may not be sold, transferred, assigned, hypothecated or divided
into two or more Warrants of smaller denominations, nor may any Warrant
Shares issued pursuant to exercise of this Warrant be transferred, except as
provided in Section 7 hereof.
2. EXCHANGE AND REPLACEMENT.
Subject to Sections 1 and 7 hereof, this Warrant is exchangeable upon
the surrender hereof by the Holder to the Company at its principal office for
new Warrants of like tenor representing in the aggregate the right to
purchase the number of Warrant Shares purchasable hereunder, each of such new
Warrants to represent the right to purchase such number of Warrant Shares
(not to exceed the aggregate total number purchasable hereunder) as shall be
designated by the Holder at the time of such surrender. Upon receipt by the
Company of evidence reasonably satisfactory to it of the loss, theft,
destruction, or mutilation of this Warrant, and, in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to it, and upon
surrender and cancellation of this Warrant, if mutilated, the Company will
make and deliver a new Warrant of like tenor, in lieu of this Warrant;
provided, however, that if the Representatives shall be such Holder, an
agreement of indemnity by such Holder shall be sufficient for all purposes of
this Section 2. This Warrant shall be promptly canceled by the Company upon
the surrender hereof in connection with any exchange or replacement. The
Company shall pay all expenses, taxes (other than stock transfer taxes), and
other charges payable in connection with the preparation, execution, and
delivery of Warrants pursuant to this Section 2.
3. ISSUANCE OF THE WARRANT SHARES.
(a) The Company agrees that the shares of Common Stock purchased
hereby shall be and are deemed to be issued to the Holder as of the close of
business on the date on which this Warrant shall have been surrendered and
the payment made for such Warrant Shares as aforesaid. Subject to the
provisions of the next section, certificates for the Warrant Shares so
purchased shall be delivered to the Holder within a reasonable time, not
exceeding fifteen (15) days after the rights represented by this
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Warrant shall have been so exercised, and, unless this Warrant has expired, a
new Warrant representing the right to purchase the number of Warrant Shares,
if any, with respect to which this Warrant shall not then have been exercised
shall also be delivered to the Holder within such time.
(b) Notwithstanding the foregoing, however, the Company shall not be
required to deliver any certificate for Warrant Shares upon exercise of this
Warrant except in accordance with exemptions from the applicable securities
registration requirements or registrations under applicable securities laws.
Nothing herein, however, shall obligate the Company to effect registrations
under federal or state securities laws, except as provided in Section 9. If
registrations are not in effect and if exemptions are not available when the
Holder seeks to exercise the Warrant, the Warrant exercise period will be
extended, if need be, to prevent the Warrant from expiring, until such time
as either registrations become effective or exemptions become available, and
the Warrant shall then remain exercisable for a period of at least 45
calendar days from the date the Company delivers to the Holder written notice
of the availability of such registrations or exemptions. The Holder agrees
to execute such documents and make such representations, warranties, and
agreements as may be required solely to comply with the exemptions relied
upon by the Company, or the registrations made for the issuance of the
Warrant Shares.
4. COVENANTS OF THE COMPANY.
The Company covenants and agrees that all Warrant Shares will, upon
issuance, be duly authorized and issued, fully paid, nonassessable, and free
from all taxes, liens, and charges with respect to the issue thereof. The
Company further covenants and agrees that during the period within which the
rights represented by this Warrant may be exercised, the Company will at all
times have authorized and reserved for the purpose of issue or transfer upon
exercise of the subscription rights evidenced by this Warrant a sufficient
number of shares of Common Stock to provide for the exercise of the rights
represented this Warrant.
5. ANTIDILUTION ADJUSTMENTS.
The provisions of this Warrant are subject to adjustment as provided in
this Section 5.
(a) The Warrant Exercise Price shall be adjusted from time to time
such that in case the Company shall hereafter:
(i) pay any dividends on any class of stock of the Company
payable in Common Stock or securities convertible into Common
Stock;
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<PAGE>
(ii) subdivide its then outstanding shares of Common Stock
into a greater number of shares; or
(iii) combine outstanding shares of Common Stock, by
reclassification or otherwise;
then, in any such event, the Warrant Exercise Price in effect immediately
prior to such event shall (until adjusted again pursuant hereto) be adjusted
immediately after such event to a price determined by dividing (a) the total
number of shares of Common Stock outstanding immediately prior to such event
(including the maximum number of shares of Common Stock issuable in respect
of any securities convertible into Common Stock), multiplied by the then
existing Warrant Exercise Price, by (b) the total number of shares of Common
Stock outstanding immediately after such event (including the maximum number
of shares of Common Stock issuable in respect of any securities convertible
into Common Stock), and the resulting quotient shall be the adjusted Warrant
Exercise Price per share. An adjustment made pursuant to this subsection
shall become effective immediately after the record date in the case of a
dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision, combination or reclassification.
If, as a result of an adjustment made pursuant to this subsection, the
Holder of any Warrant thereafter surrendered for exercise shall become
entitled to receive shares of two or more classes of capital stock or shares
of Common Stock and other capital stock of the Company, the Board of
Directors (whose determination shall be conclusive) shall determine the
allocation of the adjusted Warrant Exercise Price between or among shares of
such classes of capital stock or shares of Common Stock and other capital
stock. All calculations under this subsection shall be made to the nearest
cent. In the event that at any time as a result of an adjustment made
pursuant to this subsection, the holder of any Warrant thereafter surrendered
for exercise shall become entitled to receive any shares of the Company other
than shares of Common Stock, the Warrant Exercise Price of such other shares
so receivable upon exercise of any Warrant shall be subject to adjustment
from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to Common Stock contained in this
Section.
(b) Upon each adjustment of the Warrant Exercise Price pursuant to
Section 5(a) above, the Holder of each Warrant shall thereafter (until
another such adjustment) be entitled to purchase at the adjusted Warrant
Exercise Price the number of shares, calculated to the nearest full share,
obtained by multiplying the number of shares specified in such Warrant (as
adjusted as a result of all adjustments in the Warrant Exercise Price in
effect prior to such adjustment) by the Warrant Exercise Price in effect
prior to such adjustment and dividing the product so obtained by the adjusted
Warrant Exercise Price.
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<PAGE>
(c) In case of any consolidation or merger to which the Company is a
party other than a merger or consolidation in which the Company is the
continuing corporation, or in case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially as
an entirety, or in the case of any statutory exchange of securities with
another corporation (including any exchange effected in connection with a
merger of a third corporation into the Company), there shall be no adjustment
under subsection (a) of this Section above but the Holder of each Warrant
then outstanding shall have the right thereafter to convert such Warrant into
the kind and amount of shares of stock and other securities and property
which such Holder would have owned or have been entitled to receive
immediately after such consolidation, merger, statutory exchange, sale, or
conveyance had such Warrant been converted immediately prior to the effective
date of such consolidation, merger, statutory exchange, sale, or conveyance
and in any such case, if necessary, appropriate adjustment shall be made in
the application of the provisions set forth in this Section with respect to
the rights and interests thereafter of any Holders of the Warrant, to the end
that the provisions set forth in this Section shall thereafter
correspondingly be made applicable, as nearly as may reasonably be, in
relation to any shares of stock and other securities and property thereafter
deliverable on the exercise of the Warrant. The provisions of this
subsection shall similarly apply to successive consolidations, mergers,
statutory exchanges, sales or conveyances.
(d) Upon any adjustment of the Warrant Exercise Price, then and in
each such case, the Company shall give written notice thereof, by first-class
mail, postage prepaid, addressed to the Holder as shown on the books of the
Company, which notice shall state the Warrant Exercise Price resulting from
such adjustment and the increase or decrease, if any, in the number of shares
of Common Stock purchasable at such adjusted Warrant Exercise Price upon the
exercise of this Warrant, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
6. NO VOTING RIGHTS.
This Warrant shall not entitle the Holder to any voting rights or other
rights as a shareholder of the Company.
7. NOTICE OF TRANSFER OF WARRANT OR RESALE OF THE WARRANT SHARES.
(a) Subject to the sale, assignment, hypothecation, or other transfer
restriction set forth in Section 1 hereof, the Holder, by acceptance hereof,
agrees to give written notice to the Company before transferring this Warrant
or transferring any Warrant Shares of such Holder's intention to do so,
describing briefly the manner of any proposed transfer. Promptly upon
receiving such written notice, the Company shall present copies thereof to
the Company's counsel and to counsel to the original purchaser of this
Warrant.
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If in the opinion of each such counsel the proposed transfer may be effected
without registration or qualification (under any federal or state securities
laws), the Company, as promptly as practicable, shall notify the Holder of
such opinion, whereupon the Holder shall be entitled to transfer this Warrant
or to dispose of Warrant Shares received upon the previous exercise of this
Warrant, all in accordance with the terms of the notice delivered by the
Holder to the Company; provided that an appropriate legend may be endorsed on
this Warrant or the certificates for such Warrant Shares respecting
restrictions upon transfer thereof necessary or advisable in the opinion of
counsel and satisfactory to the Company to prevent further transfers which
would be in violation of Section 5 of the Securities Act of 1933, as amended
(the "1933 Act"), and applicable state securities laws; and provided further
that the prospective transferee or purchaser shall execute such documents and
make such representations, warranties, and agreements as may be required
solely to comply with the exemptions relied upon by the Company for the
transfer or disposition of the Warrant or Warrant Shares.
(b) If in the opinion of either of the counsel referred to in this
Section 7, the proposed transfer or disposition of this Warrant or such
Warrant Shares described in the written notice given pursuant to this Section
7 may not be effected without registration or qualification of this Warrant
or such Warrant Shares, the Company shall promptly give written notice
thereof to the Holder and the Holder will limit its activities in respect to
this Warrant or such Warrant shares to such activities as, in the opinion of
both such counsel, are permitted by law.
8. FRACTIONAL SHARES.
Fractional shares shall not be issued upon the exercise of this
Warrant, but in any case where the Holder would, except for the provisions of
this Section, be entitled under the terms hereof to receive a fractional
share, the Company shall, upon the exercise of this Warrant for the largest
number of whole shares then called for, pay a sum in cash equal to the sum of
(a) the excess, if any, of the Market Price on the date of exercise of such
fractional share over the proportional part of the Warrant Exercise Price
represented by such fractional share, plus (b) the proportional part of the
Warrant Exercise Price represented by such fractional share. For purposes of
this Section, the term "Market Price" as of a particular date with respect to
shares of Common Stock of any class or series means the last reported sale
price on such date or, if none, the average of the last reported closing bid
and asked prices on any national securities exchange or quoted in the
National Association of Securities Dealers, Inc.'s Automated Quotations
System ("Nasdaq"), or if not listed on a national securities exchange or
quoted in Nasdaq, the average of the last reported closing bid and asked
prices as reported by Metro Data Company, Inc. from quotations by market
makers in such Common Stock on the Minneapolis-St.Paul local over-the-counter
market.
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<PAGE>
9. REGISTRATION RIGHTS.
(a) If at any time after February __, 1999, and prior to the end of
the two-year period following complete exercise of this Warrant or February
__, 2005, whichever occurs earlier, the Company proposes to register under
the 1933 Act (except by a Form S-4 or Form S-8 Registration Statement or any
successor forms thereto or such other form as would not allow the
registration of such shares) or qualify for a public distribution under
Section 3(b) of the 1933 Act, any of its equity securities or debt with
equity features, it will give written notice to all Holders of this Warrant,
any Warrants issued pursuant to Section 2 and/or Section 3(a) hereof, and any
Warrant Shares of its intention to do so and, on the written request of any
such Holder given within twenty (20) days after receipt of any such notice
(which request shall specify the interest in the Warrant Shares intended to
be sold or disposed of by such Holder and describe the nature of any proposed
sale or other disposition thereof), the Company will use its best efforts to
cause all such Warrant Shares, the Holders of which shall have requested the
registration or qualification thereof, to be included in such registration
statement proposed to be filed by the Company; provided, however, that if a
greater number of Warrant Shares is offered for participation in the proposed
offering than in the reasonable opinion of the managing underwriter of the
proposed offering can be accommodated without adversely affecting the
proposed offering, then the amount of Warrant Shares proposed to be offered
by such Holders for registration, as well as the number of securities of any
other selling shareholders participating in the registration, shall be
proportionately reduced to a number deemed satisfactory by the managing
underwriter.
(b) On a one-time basis during the four-year period commencing
February __, 1999 (one year after the Effective Date as defined in the
Underwriting Agreement), upon request by the Holder or Holders of a majority
in interest of this Warrant, of any Warrants issued pursuant to Section 2
and/or Section 3(a) hereof, and of any Warrant Shares, the Company will
promptly take all necessary steps to register on Form S-3 under the 1933 Act
(if such Form is then available to the Company) and the securities laws of
such states as the Holders may reasonably request, the number of Warrant
Shares issued and to be issued upon exercise of the Warrants requested by
such Holders in their request to the Company. The Company shall keep
effective and maintain any registration, qualification, notification, or
approval specified in this subparagraph (b) for such period (not to exceed 9
months) as may be reasonably necessary for such Holder or Holders of such
Warrant Shares to dispose thereof and from time to time shall amend or
supplement the prospectus used in connection therewith to the extent
necessary in order to comply with applicable law.
(c) With respect to each inclusion of securities in a registration
statement pursuant to this Section 9, the Company shall bear the following
A-7
<PAGE>
fees, costs, and expenses: all registration, filing and NASD fees, Nasdaq
fees, printing expenses, fees and disbursements of counsel and accountants
for the Company, fees and disbursements of counsel for the underwriter or
underwriters of such securities (if the offering is underwritten and the
Company is otherwise required to bear such fees and disbursements), all
internal expenses, the premiums and other costs of policies of insurance
against liability arising out of the public offering, and legal fees and
disbursements and other expenses of complying with state securities laws of
any jurisdictions in which the securities to be offered are to be registered
or qualified. Fees and disbursements of special counsel and accountants for
the selling Holders, underwriting discounts and commissions, and transfer
taxes for selling Holders and any other expenses relating to the sale of
securities by the selling Holders not expressly included above shall be borne
by the selling Holders.
(d) The Company hereby agrees to indemnify each of the Holders of any
Warrant Shares included in any such registration, and the officers and
directors, if any, who control such Holders, within the meaning of Section 15
of the 1933 Act, against all losses, claims, damages, and liabilities caused
by (1) any untrue statement or alleged untrue statement of a material fact
contained in any Registration Statement or Prospectus (and as amended or
supplemented if the Company shall have furnished any amendments thereof or
supplements thereto), any Preliminary Prospectus or any state securities law
filings; (2) any omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims, damages, or
liabilities are caused by any untrue statement or omission contained in
information furnished in writing to the Company by such Holder or any
underwriter expressly for use therein; and each such Holder by its acceptance
hereof severally agrees that it will indemnify and hold harmless the Company,
each of its directors, each of its officers who signs such Registration
Statement, and each person, if any, who controls the Company, within the
meaning of Section 15 of the 1933 Act, with respect to losses, claims,
damages, or liabilities which are caused by any untrue statement or omission
contained in information furnished in writing to the Company by such Holder
expressly for use therein.
10. ADDITIONAL RIGHT TO CONVERT WARRANT.
(a) The Holder of this Warrant shall have the right to require the
Company to convert this Warrant (the "Conversion Right") at any time after it
is exercisable, but prior to its expiration, into shares of Company Common
Stock as provided for in this Section 10. Upon exercise of the Conversion
Right, the Company shall deliver to the Holder (without payment by the Holder
of any Warrant Exercise Price) that number of shares of Company Common Stock
equal to the quotient obtained by dividing (x) the value of the
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<PAGE>
Warrant at the time the Conversion Right is exercised (determined by
subtracting the Warrant Exercise Price for a Warrant Share in effect
immediately prior to the exercise of the Conversion Right from the Fair
Market Value of a Warrant Share immediately prior to the date of the exercise
of the Conversion Right and multiplying that number by the number of Warrant
Shares for which the Conversion Right is being exercised) by (y) the Fair
Market Value of a Warrant Share immediately prior to the exercise of the
Conversion Right.
(b) The Conversion Right may be exercised by the Holder, at any time
or from time to time, prior to the expiration of the Warrant, on any business
day by delivering a written notice in the form attached hereto (the
"Conversion Notice") to the Company at the offices of the Company stating
that the Holder desires to exercise the Conversion Right and specifying (i)
the total number of shares with respect to which the Conversion Right is
being exercised and (ii) a place and date not less than five or more than 20
business days from the date of the Conversion Notice for the closing of such
purchase.
(c) At any closing under Section 10(b) hereof, (i) the Holder will
surrender the Warrant and (ii) the Company will deliver to the Holder (A) a
certificate or certificates for the number of shares of Company Common Stock
issuable upon such conversion, together with cash, in lieu of any fraction of
a share and (B) a new warrant representing the number of shares, if any, with
respect to which the Warrant shall not have been exercised.
(d) For purposes of this Section 10, Fair Market Value of a Warrant
Share as of a particular date (the "Determination Date") shall mean:
(i) If the Company's Common Stock is traded on an exchange or is
quoted on Nasdaq, then the average closing or last sale prices, respectively,
reported for the ten (10) business days immediately preceding the
Determination Date, and
(ii) If the Company's Common Stock is not traded on an exchange or on
Nasdaq but is traded on the over-the-counter market, then the average closing
bid and asked prices reported for the ten (10) business days immediately
preceding the Determination Date.
IN WITNESS WHEREOF, The Sportsman's Guide, Inc. has caused this Warrant
to be signed by its duly authorized officer and this Warrant to be dated
February __, 1998.
THE SPORTSMAN'S GUIDE, INC.
___________________________
A-9
<PAGE>
By:
Its:
A-10
<PAGE>
THE SPORTSMAN'S GUIDE, INC.
WARRANT EXERCISE
(TO BE SIGNED ONLY UPON EXERCISE OF WARRANT)
The undersigned, the holder of the foregoing Warrant, hereby
irrevocably elects to exercise the purchase right represented by such Warrant
for, and to purchase thereunder, _______ shares of the Common Stock of The
Sportsman's Guide, Inc., to which such Warrant relates and herewith makes
payment of $____________ therefor in cash or by certified or cashier's check
and requests that the certificates for such shares be issued in the name of,
and be delivered to _______________________, whose address is set forth below
the signature of the undersigned. If said number of shares shall not be all
the shares purchasable under the Warrant, a new warrant is to be issued in
the name of the undersigned for the balance remaining of the shares
purchasable thereunder.
Name of Warrant Holder:
________________________________
(Please print)
Address of person to whom shares
are to be issued:
________________________________
________________________________
Tax Identification No. or Social
Security No. of person to whom
shares are to be issued:
________________________________
Signature: ____________________
NOTE: THE ABOVE SIGNATURE SHOULD
CORRESPOND EXACTLY WITH THE NAME
OF THE WARRANT HOLDER AS IT
APPEARS ON THE FIRST PAGE OF THE
WARRANT OR ON A DULY EXECUTED
WARRANT ASSIGNMENT
Dated: ________________________
A-11
<PAGE>
THE SPORTSMAN'S GUIDE, INC.
WARRANT ASSIGNMENT
(TO BE SIGNED ONLY UPON TRANSFER OF WARRANT)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ______________________, the assignee, whose address is , and
whose tax identification or social security number is
, the right represented by the foregoing Warrant to purchase _________
shares of the Common Stock of The Sportsman's Guide, Inc., to which the
foregoing Warrant relates and appoints ________ attorney to transfer said
right on the books of The Sportsman's Guide, Inc., with full power of
substitution in the premises. If said number of shares shall not be all the
shares purchasable under the Warrant, a new warrant is to be issued in the
name of the undersigned for the balance remaining of the shares purchasable
thereunder.
Name of Warrant Holder:
______________________________
(Please print)
Address of Warrant Holder:
______________________________
______________________________
Tax Identification No. or Social
Security No. of Warrant Holder:
______________________________
Signature _________________
NOTE: THE ABOVE SIGNATURE SHOULD
CORRESPOND EXACTLY WITH THE NAME
OF THE WARRANT HOLDER AS IT APPEARS
ON THE FIRST PAGE OF THE WARRANT OR
ON A DULY EXECUTED WARRANT
ASSIGNMENT
Dated: ______________________
A-12
<PAGE>
THE SPORTSMAN'S GUIDE, INC.
CONVERSION NOTICE
(TO BE EXECUTED ONLY UPON CONVERSION OF WARRANT PURSUANT TO SECTION 10)
The undersigned hereby irrevocably elects to exercise the Conversion Right
as provided for in Section 10 of the foregoing Warrant, with respect to _____
of the previously unexercised shares, which shall result pursuant to the
conversion provisions of Section 10 in the purchase thereunder of ______
shares of Common Stock of The Sportsman's Guide, Inc., and herewith tenders
the Warrant in full payment for the purchased shares, as provided for in
Section 10 of the foregoing Warrant. If said number of shares shall not be
all the shares purchasable under the Warrant, a new warrant is to be issued
in the name of the undersigned for the remaining balance of the unexercised
shares.
Please issue a certificate or certificates for such Common Stock in the
name of, and pay any cash for any fractional share, to:
Name of Warrant Holder:
________________________
(Please print)
Address of Warrant Holder:
________________________
________________________
Tax Identification No. or Social
Security No. of Warrant Holder:
________________________
Signature _____________
NOTE: THE ABOVE SIGNATURE SHOULD
CORRESPOND EXACTLY WITH THE NAME OF
THE WARRANT HOLDER AS IT APPEARS ON
THE FIRST PAGE OF THE WARRANT OR ON
A DULY EXECUTED WARRANT ASSIGNMENT
Dated: ____________________
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<PAGE>
Exhibit 10.10
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made and entered into as of the ____ day of
________, 1997, by and between THE SPORTSMAN'S GUIDE, INC., a Minnesota
corporation (the "COMPANY"), and _________________ ("EMPLOYEE"), under the
following circumstances:
A. Employee has been employed by the Company and has significant
experience in the operation and management of the Company's
business.
B. The Company desires to retain Employee's experience and expertise
for the continued success of the Company's business.
C. The parties desire to have their rights, obligations and duties
specified herein.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties hereby agree as follows:
1. EMPLOYMENT AND DUTIES; STANDARD OF SERVICE. The Company hereby
employs Employee as its ___________________________________________________
___________, with such duties and subject to such enhanced capacities and
titles as may be determined from time to time by the Board of Directors of
the Company (the "BOARD OF DIRECTORS"). Employee hereby accepts such
employment and agrees that while employed by the Company, he shall devote his
full attention and time during normal business hours to the business and
affairs of the Company and to use the Employee's best efforts to perform
faithfully and efficiently such responsibilities.
2. TERM.
(a) TERM. Subject to Section 3 hereunder, the term of this
Agreement shall begin as of the date hereof and shall continue until December
31, ____. Subject to the provisions of Section 3 hereunder, on January 1,
____ and on each January 1st thereafter, the term of this Agreement shall be
automatically extended for one (1) additional year unless, on or before the
October 31st immediately preceding such January 1st, either Employee or the
Company gives written notice to the other of the cessation of further
extensions, in which case no further automatic extensions shall occur.
(b) SURVIVAL OF CERTAIN PROVISIONS. Notwithstanding anything to the
contrary set forth in this Agreement, the provisions contained in this
Section 2(b), Section 3(d) and Sections 5, 6, 7 and 12 of this Agreement
shall survive the termination of this Agreement.
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<PAGE>
3. EARLY TERMINATION/COMPENSATION UPON TERMINATION.
(a) DEATH, DISABILITY OR MUTUAL AGREEMENT. This Agreement shall
terminate prior to its stated termination date, and immediately upon the
happening of any of the following events:
(i) the death of Employee;
(ii) the mental or physical disability or incapacity of
Employee, which causes Employee to be unable to perform his duties
hereunder, which such disability or incapacity shall be deemed to have
occurred upon the earlier of (A) Employee becoming entitled to receive
"total disability benefits" (or their substantive equivalent form of
benefits) under the Company's disability plan(s) then in effect; (B) a
determination that Employee has become permanently disabled made by an
independent physician mutually agreed upon by the Company and Employee
in good faith or (C) Employee shall have been unable, unwilling, or
shall have failed to perform his duties hereunder for a period of one
hundred eighty (180) days during any twelve (12) consecutive months;
(iii) execution by the Company and Employee of a written
agreement of termination (which may specify a later effective date of
such termination); or
(iv) December 31 of any year in which Employee attains the age
of 65, at which time Employee shall retire unless otherwise agreed by
the Employee and the Company.
(b) BY THE COMPANY.
(i) The Company may terminate this Agreement upon the giving of
notice by the Company to Employee of termination for Cause. For this
purpose, "Cause" shall mean:
(A) the willful and continued failure by Employee to (I)
comply with the terms of this Agreement, (II) comply with policies of
the Board of Directors of the Company or (III) otherwise substantially
perform his duties with the Company (other than as a result of
disability of the type described in Section 3(a)(ii)); or
(B) the willful engaging by Employee in conduct which is
demonstrably and materially injurious to Company, monetarily or
otherwise; or
(C) (I) dishonesty which is materially injurious to the
Company, including, without limitation, the misappropriation of Company
trade
2
<PAGE>
secrets or customer mailing lists, (II) intoxication during
normal working hours, (III) actions involving moral turpitude, (IV)
addiction to or abuse of drugs (the effect of which is materially
injurious to the Company) or (V) conviction of a felony.
(ii) The Company may terminate this Agreement without cause upon
one hundred eighty (180) days' written notice to Employee provided Company
complies with the provisions of Section 3(d)(iv).
(c) BY EMPLOYEE. Employee may terminate this Agreement in accordance
with the following:
(i) immediately upon the giving of notice by Employee to the
Company of termination for Good Reason. For this purpose, "GOOD REASON"
shall mean any one or more of the following:
(A) an adverse change in Employee's status or position
as an executive officer of the Company including, without
limitation, any adverse change in Employee's status or position as
a result of a material diminution in Employee's duties,
responsibilities or authority as of the date of this Agreement (or
any status or position to which Employee may be promoted after the
date hereto or the assignment to Employee of any duties or
responsibilities which, in Employee's reasonable judgment, are
inconsistent with Employee's status or position, or any removal of
Employee from or any failure to reappoint or reelect Employee to
such position as an officer of the Company (except in connection
with any termination of Employee's employment described in Sections
3(a) or (b));
(B) a reduction by the Company in Employee's Base Salary
(as hereinafter defined) as in effect immediately prior to the date
of this Agreement or as the same may be increased from time to time
or a change in the eligibility requirements or performance criteria
under any Plan (as hereinafter defined) under which Employee is
covered immediately prior to the date of this Agreement, which such
change is materially adverse to Employee;
(C) without replacement by a Plan providing benefits to
Employee equal to or greater than those discontinued, the failure
by the Company to continue in effect, within its maximum stated
term, any Plan in which Employee is participating or the taking of
any action by the Company that would materially and adversely
affect Employee's participation or materially reduce Employee's
benefits under any Plan;
3
<PAGE>
(D) the taking of any action by the Company that would
materially and adversely affect the physical conditions existing
immediately prior to the date of this Agreement in or under which
Employee performs his employment duties;
(E) the Company's announcement of plans to relocate or
undertaking of efforts to relocate its executive offices
(including, without limitation, the offices of Employee) to a
location outside of the Minneapolis/St. Paul metropolitan area;
(F) failure by the Company to obtain from any successor
in interest thereto assent to the terms of this Agreement.
Notwithstanding any provision in this Section 3(c) to the contrary, Good Reason
shall not include any reduction in bonus amounts paid or options or other
benefits granted to Employee based on the operating performance and/or financial
condition of the Company.
(ii) at any time upon one hundred eighty (180) days' prior
written notice by Employee to the Company.
(d) COMPENSATION UPON TERMINATION. Upon termination of Employee's
employment, Employee shall receive the following:
(i) DEATH OR DISABILITY. Upon any termination of Employee's
employment described in Sections 3(a)(i) or 3(a)(ii), the Employee
shall, within ten (10) days of such termination, receive the Base Salary
specified in Section 4 of this Agreement through the date of such
termination, and without further action by the Board of Directors or any
committee thereof, shall further receive, within ninety (90) days of
such termination, a lump sum payment equal to twelve (12) months of the
monthly Base Salary then being received by Employee; such benefits to be
at least partially funded through the Company's purchase of life and
disability insurance provided that the Company's failure to obtain
and/or maintain any such insurance shall not relieve the Company of any
obligation under this Section 3(d)(i). In addition, Employee shall be
paid a pro rata portion (based on the date of termination) of the bonus
that would have been payable to the Employee under the Company's bonus
plan in effect for such year, but for the termination of Employee's
employment. In making the determination as to the amount of bonus for
which Employee is eligible, the Company and members of its Board of
Directors and/or management charged with making such determination shall
calculate the amount of such bonus as if Employee had achieved all
subjective performance standards applicable to such determination but
otherwise based on the actual operating performance and financial
condition of the Company. Any such bonus payable under this Section
3(d)(i)
4
<PAGE>
shall be payable at the time of and in accordance with the terms and
conditions governing the payment of bonuses to other members of the
Company's senior management employees.
(ii) TERMINATION FOR RETIREMENT, FOR CAUSE OR VOLUNTARY
TERMINATION (OTHER THAN FOR GOOD REASON). Upon any termination of
employment described in Sections 3(a)(iv), 3(b) or 3(c)(ii), Employee
shall be entitled to receive the Base Salary, specified in Section 4 of
this Agreement through the date of such termination, and he shall not be
entitled to additional or further salary; provided that upon a
termination described in Section 3(a)(iv), all options to purchase
shares of the Company held by the Employee shall become vested and may
be exercised at any time until such options expire unless otherwise
cancelled pursuant to Section 3(e)(iii).
(iii) TERMINATION BY MUTUAL AGREEMENT. If Employee's employment
under this Agreement is terminated by the mutual agreement of Employee
and the Company, the Company shall provide Employee with the payments
and benefits specified in such Agreement.
(iv) TERMINATION FOR GOOD REASON OR WITHOUT CAUSE OR COMPANY
FAILURE TO RENEW AGREEMENT. Upon any termination of employment by
Employee for Good Reason as described in Section 3(c)(i) (other than
Good Reason arising after a Substantial Event), any termination of
employment by the Company pursuant to Section 3(b)(ii), or any failure
or refusal by the Company to permit the automatic renewal of this
Agreement in accordance with Section 2(a) hereof (other than a failure
to renew arising within twenty-four (24) months after a Substantial
Event), the Company, shall, without further action by the Board of
Directors or any committee thereof and within ten (10) days of such
termination, make a lump sum payment to Employee equal to twenty-four
(24) months of the monthly Base Salary then being received by Employee
and shall maintain in full force and effect, for a period of twenty-four
(24) months commencing on the date of such termination, all Plans
relating to medical, dental, accident and disability insurance then in
effect, at the same levels and coverages as senior management employees
were receiving immediately prior to Employee's termination. In
addition, Employee shall be paid a pro rata portion (based on the date
of termination) of the bonus that would have been payable to the
Employee under the Company's bonus plan in effect for such year, but for
the termination of Employee's employment. In making the determination
as to the amount of bonus for which Employee is eligible, the Company
and members of its Board of Directors and/or management charged with
making such determination shall calculate the amount of such bonus as if
Employee had achieved all subjective performance standards applicable to
such determination but otherwise based on the actual operating
performance and financial
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condition of the Company. Any such bonus payable under this Section
3(d)(iv) shall be payable at the time of and in accordance with the terms
and conditions governing the payment of bonuses to other members of the
Company's senior management employees.
(v) TERMINATION BY COMPANY FOLLOWING SUBSTANTIAL EVENT OR
TERMINATION BY EMPLOYEE FOR GOOD REASON FOLLOWING SUBSTANTIAL EVENT. In
the event that at any time within twenty-four (24) months after the
occurrence of a Substantial Event, the Company terminates Employee's
employment pursuant to Section 3(b)(ii), the Company fails to permit the
renewal of this Agreement by its terms or the Employee terminates
employment for Good Reason, the Employee shall receive the payments and
other compensation and benefits described in Section 5(c) hereof.
(e) In consideration of this Agreement and to induce the Company to
grant to Employee certain stock options,
(i) in the event that this Agreement is terminated pursuant to
Sections 3(b)(i)(C) or 3(c)(ii), all options (granted on or after July
1, 1997) to purchase shares of Common Stock of the Company then held by
Employee shall be cancelled and forfeited.
(ii) in the event that this Agreement is terminated pursuant to
Section 3(b)(i)(A) or 3(b)(i)(B), all options to purchase shares of
Common Stock of the Company then held by Employee which have vested as
of the date of such termination shall be and remain exercisable for a
period of thirty (30) days; at which time, if not exercised, such
options will expire. All other such options which have not vested as of
the date of such termination shall be immediately cancelled and
forfeited.
(iii) notwithstanding any other provision to the contrary
herein, in the event Employee breaches or otherwise violates the
covenants contained in Section 7(b), regardless of the reason for
termination, all options (granted on or after July 1, 1997) to purchase
shares of Common Stock of the Company then held by Employee shall be
cancelled and forfeited and all shares of Common Stock previously
acquired by Employee upon the exercise of such options granted by the
Company shall be sold to the Company at the exercise price of the option
(or if such shares are not then owned, Employee shall pay to the Company
an amount equal to any economic gain realized on the sale). All shares
of Common Stock issued upon exercise of any option held by Employee
shall be endorsed with a legend evidencing the restrictions described in
this Section 3(e)(iii).
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4. COMPENSATION, BENEFITS AND EXPENSES.
(a) BASE SALARY. For all services rendered under this Agreement
during the term of Employee's employment, the Company shall pay Employee a
minimum base salary at an annual rate that is not less than the annual rate
currently being paid Employee, or at such higher annual rate as may be from
time to time determined by action of the Company's Board of Directors or
committee thereof (the "BASE SALARY"). If the Base Salary is increased from
time to time during the term of this Agreement, the increased amount shall
then constitute the Base Salary for the remainder of the term and any
extensions thereof, subject to any subsequent increases. Except as otherwise
set forth herein, the Base Salary shall be payable in accordance with the
Company's customary payroll procedures.
(b) OTHER COMPENSATION AND BENEFITS. In accordance with their
terms, Employee shall be entitled to participate in any bonus or incentive
compensation agreements, plans, programs, policies or arrangements sponsored,
maintained or contributed to by the Company, to which the Company is a party
or under which employees of the Company are covered, including, without
limitation, any stock option, restricted stock or any other equity-based
compensation plan, annual or long-term incentive (bonus) plan and any
employee benefit plan such as a thrift, pension, profit sharing, deferred
compensation, medical, dental, disability, accident, life insurance,
automobile allowance, perquisite, fringe benefit, vacation, sick or parental
leave, severance or relocation plan or policy or any other agreement, plan,
program, policy or arrangement intended to benefit employees or executive
officers of the Company (collectively, "PLANS" and each a "PLAN").
(c) BUSINESS EXPENSES. During the term of Employee's employment
under this Agreement, the Company shall, in accordance with, and to the
extent of, its uniform policies in effect from time to time, bear all
ordinary and necessary business expenses incurred by Employee in performing
his duties hereunder including, without limitation, all travel, lodging, meal
and entertainment expenses while away from home on business in the service of
the Company, provided that Employee accounts for such expenses to the
Company, in the manner reasonably prescribed from time to time by the Company.
5. CERTAIN RIGHTS UPON A SUBSTANTIAL EVENT.
(a) SUBSTANTIAL EVENT DEFINED. For purposes of this Agreement, a
"Substantial Event" shall mean the following events:
(i) the Company sells, transfers, or otherwise disposes for
value all or substantially all of its assets;
(ii) the Company's shareholders authorize the Company to become
party to a merger, consolidation, sale, of
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assets or other reorganization as a consequence of which members of the
Board of Directors in office immediately prior to such transaction or
event constitute less than a majority of the Board of Directors thereafter;
or
(iii) a tender offer is consummated for the acquisition of fifty
percent (50%) or more of the Company's issued and outstanding voting
capital stock.
(b) EVENTS OCCURRING UPON A SUBSTANTIAL EVENT. Immediately upon
the occurrence of a Substantial Event, without any action by the Board of
Directors or any committee thereof, all outstanding options granted as of
such date to Employee under the Company's 1996 Stock Option Plan or any
subsequent plan covering the grant of "incentive stock options" as defined
under Section 422 of the Code shall, to the extent not then exercisable,
become immediately exercisable in full and shall remain exercisable during
the remaining term thereof, whether or not Employee remains employed by the
Company.
(c) TERMINATION OF EMPLOYMENT OR FAILURE TO RENEW FOLLOWING
SUBSTANTIAL EVENT. If, (i) during any time within twenty-four (24) months
following a Substantial Event the Company shall (A) terminate Employee's
employment other than for Cause or the death, disability or retirement of
Employee or (B) fail or refuse to permit the renewal of the term of this
Agreement by its terms, or (ii) at any time within twenty-four (24) months
following a Substantial Event, Employee shall terminate this Agreement for
Good Reason, then, and without further action by the Board of Directors or
any committee thereof, the Company shall, within ten (10) days of such
termination, make a lump sum payment to Employee equal to thirty-six (36)
months of the monthly Base Salary then being received by Employee and shall
maintain in full force and effect, for a period of three (3) years commencing
on the date of such termination, all Plans relating to medical, dental,
accident and disability insurance then if effect, at the same levels and
coverages as Employee was receiving on the date immediately prior to the
Substantial Event. In addition, Employee shall be paid a pro rata portion
(based on the date of termination) of the bonus that would have been payable
to the Employee under the Company's bonus plan in effect for such year, but
for the termination of Employee's employment. In making the determination as
to the amount of bonus for which Employee is eligible, the Company, and
members of its Board of Directors and/or management charged with making such
determination shall calculate the amount of such bonus as if Employee had
achieved all subjective performance standards applicable to such
determination but otherwise based on the actual operating performance and
financial condition of the Company. Any such bonus payable under this
Section 5(c) shall be payable at the time of and in accordance with the terms
and conditions governing the payment of bonuses to other members of the
Company's senior management employees.
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6. TAXES.
(a) WITHHOLDING. All payments under this Agreement shall be
subject to reduction in the amount of any income, withholding, social
security, disability insurance, or similar taxes of payments which the
Company may be required or authorized to deduct by law or custom.
(b) EXCESS PARACHUTE PAYMENTS. Notwithstanding anything to the
contrary set forth in or construed under this Agreement, if any of the
payments or benefits provided for in this Agreement, together with any other
payments which Employee has the right to receive from the Company or any
corporation which is a member of an "affiliated group" (as defined in Section
1504(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
without regard to Section 1504(b) of the Code) of which the Company is a
member, constitute an "excess parachute payment" (as defined in Section
28OG(b) of the Code), the payments pursuant to this Agreement shall be
increased to the extent necessary to reimburse Employee (on a federal, state
and local income and employment after-tax basis) for the amount of the excise
tax, if any, imposed against Employee under Section 4999 of the Code, or any
applicable state and/or local counterpart thereto. The determination as to
whether any increase in the payments under this Agreement pursuant to this
Section 6(b) is necessary shall be made by Employee in good faith and such
determination shall be conclusive and binding upon the Company. The
increased payments required under this Section 6(b) shall be promptly paid to
Employee upon written demand therefor.
7. CONFIDENTIAL INFORMATION AND NONSOLICITATION.
(a) PROHIBITIONS AGAINST DISCLOSURE. Employee agrees that upon
termination of his employment with the Company for whatever reason, he will
deliver to the Company all copies of or information with respect to the
Company or its business which is not publicly known and which is in his
possession. Employee further agrees that, without the express written
consent of the Company, he will not, at any time during the term of this
Agreement or for a period of five (5) years thereafter, divulge, furnish,
disclose or make accessible to any person, firm, organization or corporation,
or use in any manner whatsoever to the detriment of the Company any such
information or materials with respect to the Company, or any aspect of its
business or operations, which are not already lawfully in the public domain.
(b) The Employee agrees that he shall not, without the express
prior written consent of the Company, at any time from the date of this
Agreement and for a period of one (1) year from the termination of Employee's
employment, for any reason, with the Company, directly or indirectly,
solicit, entice, call upon or approach any employees of the Company to enter
the employment of the Employee or any employer or business with which the
Employee is associated or in which the Employee has a financial interest.
Ownership by the Employee of less than five percent
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(5%) of the outstanding voting common stock, without any other action by or
on behalf of the Employee, of any publicly held corporation shall not
constitute a violation of this Section 7(b).
(c) SPECIFIC PERFORMANCE. Employee acknowledges that the
information received by him in the course of his employment with the Company
is of such character as to render the same unique and, therefore, agrees
disclosure thereof in violation of the covenants of Sections 7(a) or 7(b)
would be of irreparable damage to the Company. Accordingly, Employee agrees
and consents that in the event of any action or proceeding shall be
instituted by the Company to enforce any provision of this Agreement,
Employee waives the claim or defense in such action that there is an adequate
remedy at law available to the company, and Employee shall not urge in any
such action or proceeding the claim or defense that such remedy at law
exists. The parties agree that the Company's remedies for breach of this
Agreement expressly described herein shall be cumulative and the seeking or
obtainment of injunctive relief shall not preclude a claim or award for
damages or other relief as provided for herein or as otherwise may be
available to the Company.
8. NOTICES. All notices hereunder shall be in writing and shall be
deemed to have been given at the time when mailed in any general or branch
United States Post Office enclosed in a certified or registered postpaid
envelope addressed to the respective party at the address set forth below, or
at such changed address as either party may have fixed by notice; provided,
however, that any notice or change of address shall be effective only upon
receipt:
Address of Company: The Sportsman's Guide, Inc.
411 Farwell Avenue
South St. Paul, MN 55075
with a copy to: Ralph E. Heyman, Esq.
Chernesky, Heyman & Kress P.L.L.
10 Courthouse Plaza, S.W.
Suite 1100
Dayton, OH 45402
Address of Employee: [Employee's Name]
___________________
___________________
9. DIVISIBILITY. The provisions of this Agreement are divisible. If
any provision shall deemed invalid or unenforceable as to any periods of
time, territory or business activities, such provisions shall be deemed
limited to the extent necessary to render it valid and enforceable. If any
provision shall be deemed invalid or unenforceable to in other extent, the
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remaining provisions of this Agreement shall not be rendered unenforceable as
a result thereof.
10. WAIVER. Failure by either party to insist upon strict compliance
with any of the terms, conditions or conditions hereof shall not be deemed a
waiver of such term, covenant or condition nor shall any waiver or
relinquishment of any right or power hereunder at any one or more times be
deemed a waiver or relinquishment of such right or power at any other time or
times.
11. CAPTIONS. The captions used in connection with this Agreement are
for reference purposes only and shall not be construed as a part of this
Agreement.
12. SUCCESSORS AND ASSIGNS.
(a) SUCCESSORS AND ASSIGNS OF THE COMPANY. This Agreement shall
be binding upon and inure to the benefit of any successor of the Company and
any such successor shall absolutely and unconditionally assume all of the
Company's obligations hereunder. Upon Employee's written request, the
Company shall seek to have any such successor, by agreement in form and
substance satisfactory to Employee, assent to the fulfillment by the Company
of its obligations hereunder.
(b) SUCCESSORS AND ASSIGNS OF EMPLOYEE. This Agreement and all
rights of Employee hereunder shall inure to the benefit of and be enforceable
by Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If Employee should
die while any amounts would still be payable to Employee hereunder, all such
amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to Employee's devisee, legatee or other designee
or, if there be no such designee, to Employee's estate. Except as otherwise
expressly set forth in this Section 12(b), Employee may not assign this
Agreement, in whole or in part, without the prior written consent of the
Company.
13. COMPLETE AGREEMENT AND GOVERNING LAW. This Agreement supersedes
all prior agreements written or oral with respect to the subject matter
hereof. This Agreement is intended as a complete and exclusive statement of
the terms of the Agreement between the parties with respect to its subject
matter. This Agreement may be changed or terminated only in writing executed
by each party and shall be governed by the laws of the State of Minnesota.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
THE SPORTSMAN'S GUIDE, INC.
By:__________________________
Title:_______________________
EMPLOYEE:
_____________________________
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Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated January 29, 1997 accompanying the financial
statements of The Sportsman's Guide, Inc. included in the Registration
Statement and Prospectus and accompanying the financial statements and
schedule included in the annual report of The Sportsman's Guide, Inc. on Form
10-K for the fiscal year ended December 27, 1996, which is incorporated by
reference in this Registration Statement. We consent to the incorporation by
reference of said report included in Form 10-K and to the use of the
aforementioned report in the Registration Statement and Prospectus, and to the
use of our name as it appears under the caption "Experts."
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
December 29, 1997
